The Ohio General Assembly recently enacted the Ohio Revised Limited Liability Company Act (the “Revised Act”) to replace the Ohio Limited Liability Company Act (the “Current Act”) that dates back to 1994. The Revised Act keeps many of the familiar aspects of the Current Act, while making some significant changes to promote flexibility and modernize how limited liability companies (“LLCs”) function in Ohio. The Revised Act replaces the Current Act effective January 1, 2022, so practitioners and business owners have time to get familiar with the Revised Act’s significant changes, including: (i) new rules on the authority of members and managers to bind LLCs; (ii) imposing statutory penalties when LLCs do not maintain statutory agents; (iii) compiling all the prohibited operating agreement provisions in one section; and (iv) allowing LLCs to establish series LLCs.
Authority of Members and Managers to Bind the LLC
Under the Current Act, members of an LLC can decide whether members or managers will manage the LLC and spells out the authority members and managers have in each scenario. The Revised Act eliminates the distinction and provides that a person’s authority to bind the LLC depends on the provisions of the operating agreement, the default rules, or a Statement of Authority filed with the Secretary of State.
Requirement to Maintain a Statutory Agent
The Current Act requires LLCs to have a statutory agent in Ohio to accept service of process. But under the Current Act, there are no statutory penalties for an LLC that does not maintain a statutory agent. This contrasts with Ohio corporation law, which requires the Secretary of State to cancel a corporation’s articles of incorporation if the corporation does not maintain a statutory agent.
The Revised Act takes a similar approach to Ohio corporation law and requires the Secretary of State to cancel an LLC’s articles of organization if the LLC does not maintain a statutory agent. But, the company may be reinstated if it appoints a new statutory agent.
Permissible & Prohibited Operating Agreement Provisions
An LLC’s operating agreement governs relations among the members as members of an LLC and between the members and the LLC. If the LLC’s operating agreement does not provide for a particular matter, then the Revised Act’s default provisions govern that matter. The Current Act and Revised Act permit most operating agreement provisions, and allow certain rules in the operating agreement to replace the statutory rules. But, the Current Act and the Revised Act prohibit certain operating agreement provisions.
The Current Act includes a list of provisions that an operating agreement cannot change. So does the Revised Act. But the Revised Act clarifies that if the provision is not a listed provision, the operating agreement can modify or replace the statutory rules. Under the Revised Act, an operating agreement cannot do any of the following:
- Vary the nature of the LLC as a separate legal entity;
- Restrict the rights of a person who does not have any rights under the operating agreement;
- Vary the power of a court governing what happens when a person is aggrieved by the failure of another person to sign or deliver a record under the act;
- Eliminate the implied covenant of good faith and fair dealing;
- Eliminate or limit the liability of a member or other person for any act or omission that violates the implied covenant of good faith and fair dealing;
- Waive the provision that a promise to make a contribution to an LLC or series LLC is not enforceable unless it is in a signed writing;
- Waive the prohibition on issuance of a certificate of a membership interest in bearer form; or
- Waive certain requirements relating to a series of an LLC.
One of the biggest changes that the Revised Act will provide for is the creation of Series LLCs in the state of Ohio. Basically, a “Series LLC” will allow for business owners that have multiple different facets of a business to create an umbrella LLC that has “series” within the LLC, in which the assets of each series are protected from claims against and liabilities incurred by another series or the LLC as a whole.
If a business owner wants to create a Series LLC, the operating agreement for the umbrella LLC must outline what assets and liabilities it will allocate to each Series LLC. While a series is allowed to carry on any activity, whether for profit or non-profit, each series must either have (a) separate rights, powers, or duties with respect to specified property or obligations of the LLC or profits and losses associated with specified property or obligations and/or (b) a separate purpose or investment objective. Additionally, at least one member of the umbrella LLC needs to be associated with each series.
Similar to a parent LLC that desires to form and own one or more subsidiary LLCs, the concept of a Series LLC is a popular business formation strategy available in 15 states across the country, including Delaware, often considered the legal corporate hub of the United States. There also is a belief that allowing Series LLCs will help alleviate risk and may help ease the administrative burden of business owners who want to create such a structure, as Series LLCs reduce setup and administrative costs.
For purposes of the commercial activity tax, the Revised Act requires Series LLCs to file as a single taxpayer if the tax commissioner determines that the Series LLC exists to avoid paying commercial activity tax. The commercial activity tax’s minimum tax and nexus thresholds create tax avoidance opportunities for Series LLCs that file as separate taxpayers. Under the Revised Act, a Series LLC must file as a single taxpayer if one or more LLCs in the series would avoid the minimum tax or nexus threshold by filing as separate taxpayers.
Mike Sorice is an associate in the Columbus, Ohio office of Walter | Haverfield. He assists closely-held businesses with business succession planning, mergers and acquisitions, and tax planning. Mike can be reached at 614-246-2262 or firstname.lastname@example.org.