Ohio Rewrites the Law on Limited Liability Companies
On January 8, 2021, Ohio Governor Mike DeWine signed Senate Bill 276 into law effecting a restatement of the Ohio Limited Liability Company Act as Chapter 1706 of the Ohio Revised Code. The Act is the result of years of work by the Ohio State Bar Association’s Corporation Law Committee. The original Ohio Limited Liability Act was enacted in 1994. Since that time the utility and prominence of the limited liability company as a business entity has developed significantly. Although changes have been made over the years to the Ohio LLC Act in an effort to improve clarity and to keep it current, Ohio is one of the few states whose original limited liability company act has not seen a comprehensive revision.
The new Ohio LLC Act is intended to be one of the most modern limited liability company acts in the country. The new LLC Act is based on the Revised Prototype Limited Liability Company Act published by the American Bar Association’s Committee of LLCs, Partnerships and Unincorporated Entities (the “Prototype Act”), modified to take into consideration certain familiar aspects of the current Ohio LLC Act. Some of the highlights of the new LLC Act include the following:
Retaining Ohio Terminology. Most modern limited liability company acts, including the Prototype Act, use the terminology certificate of formation, limited liability company agreement, limited liability company interests, registered office and registered agent. Chapter 1706 retains the terminology used in the Ohio LLC Act to reduce confusion by businesses and practitioners familiar with the current terminology, considering that many existing limited liability companies may continue with their current operating agreement and other organizational documents in effect.
Series Limited Liability Companies. Chapter 1706 now permits Ohio series limited liability companies. The series limited liability companies establish, by way of its operating agreement, one or more designated series of assets and liabilities with which certain subjects of members might be associated. The series provisions are based on those provided in the Prototype Act. Series provisions are primarily contained at Section 1706.76, et. seq.
Elimination of Manager-Managed and Member-Managed Dichotomy and Statutory Default Authority. Consistent with the Prototype Act, SB 276 eliminates the member-managed and manager-managed bifurcation of management structures and the statutorily conferred actual and apparent authority of members and managers in those paradigms. This structure also departs from the strictly bifurcated organization contemplated by the current Ohio LLC Act. This approach is more consistent with the flexibility legal practitioners and the public have applied to structuring the governance and operation of limited liability companies which structures include managers, officers, boards of directors, managing members, etc.
Fiduciary Duties or Standards of Conduct. Consistent with the current Ohio LLC Act and certain other Ohio business entity statutes, Sections 1706.31 and 1706.311 provides for statutory default fiduciary duties for members and managers. This is a significant departure from the Prototype Act which does not provide for statutory default fiduciary duties, relying on the premise that common law provides an adequate basis for applying the obligations associated with members and agents of a limited liability company.
Consolidation of Provisions on Limited Liability Company Agreement Override. Consistent with the current Ohio LLC Act (Section 1705.081), Chapter 1706 places in one section (Section 1706.08) the various provisions that are not permitted to be modified by the operating agreement. This centralization allows for the elimination of the phrase “unless otherwise provided in the limited liability company agreement” or similar phrases throughout the Revised Ohio LLC Act and the ambiguity that results in the absence of express override language. Therefore, all provisions within Chapter 1706 are “default” provisions that may be modified by the operating agreement unless modifications are prohibited under Section 1706.08.
Practitioners and business owners will have nearly a year to adjust to the new regime as Chapter 1706 will apply to all limited liabilities companies effective January 1, 2022.
The Ohio State Bar Association Corporation Law Committee has indicated its intention to provide educational materials regarding the new statute, including form operating agreements to aid practitioners in their adaption to the new statute.
For more information please contact Rob Lesan or Emma Compton with KMK's Business Representation & Transactions Group.
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