10,000 Foot View of What You Need to Know
On February 11, 2022, Ohio’s law governing limited liability companies will change from its current form under Ohio Revised Code Chapter (“ORC”) 1705 (the “Old Law”) to its new form under ORC Chapter 1706 (the “New Law”). This means some significant changes for Ohio limited liability companies, which also apply to those organized under the Old Law. To make these changes less painful and reduce confusion, the New Law will use many of the same terms used in the Old Law. This blog is meant to provide an overview of some, but certainly not all, of those changes.
Changes Relevant to Operating Agreements
An operating agreement is a document governing the relations among the members of a limited liability company and the limited liability company. Many of the provisions of the New Law are default provisions, which a limited liability company can alter through its operating agreement. Due to the default nature of the provisions of the New Law, operating agreements existing under the Old Law should not be affected by the New Law.
Provisions That May Not Be Altered
Similar to the Old Law, a limited liability company may not alter certain provisions. For example, a limited liability company may not (i) eliminate the implied covenant of good faith and fair dealing, as discussed below; (ii) enforce promises to make capital contributions, which are not in writing; or (iii) create a situation where a limited liability company is not a separate legal entity. This is not an exhaustive list.
Limitation, Expansion, and Elimination of Fiduciary Duties
A limited liability company may alter certain duties and liabilities through an operating agreement. An example under the New Law is that a limited liability company may limit, expand, or eliminate fiduciary duties (defined by Black’s Law Dictionary as “a duty to act for someone else’s benefit, while subordinating one’s personal interests to that of the other person”) owed by members, managers, and others. However, this ability for a limited liability company to alter fiduciary duties is not absolute, as a limited liability company may not use an operating agreement to do away with what is referred to as the implied covenant of good faith and fair dealing. The Old Law did not allow for the elimination of fiduciary duties but did allow for the limitation, expansion, and elimination of the duties of loyalty and care.
Penalties For Failure to Comply with an Operating Agreement
Under the New Law, a limited liability company may, also through its operating agreement, impose any penalty or consequence upon a member for failing to comply with its operating agreement. A couple of specific examples enumerated in the New Law include (i) forcing the sale of a member’s membership interest in a limited liability company and (ii) reducing a member’s proportionate interest in a limited liability company. The Old Law did not allow for such penalties.
Third Parties’ Ability to Approve Amendments
Another wrinkle from the New Law dealing with operating agreements is that a limited liability company may vest the authority to approve amendments to its operating agreement in third parties (parties not involved in the limited liability company). The Old Law did not allow for this.
Separate Asset Series
One of the more critical changes in the New Law, which was not allowed under the Old Law, is the allowance for separate asset series in limited liability companies. Through its operating agreement, a limited liability company may establish separate series with separate (i) rights, powers, or duties regarding specified property or obligations of the limited liability company or its profits and losses; or (ii) purposes or investment objectives. Either of the foregoing is possible if each series has at least one member associated with it.
Where there is a separate asset series, the debts, liabilities, obligations, and expenses for that series are only applicable to that series, not any other series or the limited liability company in general, and vice versa.
To benefit from this treatment, a limited liability company must (i) maintain the assets of each series separately from any other series, and the limited liability company in general; and (ii) provide a statement in its operating agreement and its articles of organization (document filed with the Ohio Secretary of State to establish the limited liability company) similar to what is outlined in the preceding paragraph.
Membership Without Membership Interest or Contribution
Under the New Law, a party may become a member of a limited liability company without acquiring a membership interest or contributing to a limited liability company.
The Old Law required that a party be admitted (i) at the time a limited liability company was formed, (ii) by acquiring an interest directly from a limited liability company, or (iii) by acquiring an interest from a member of a limited liability company.
Statement of Authority
The New Law allows a limited liability company to file a statement of authority with the Ohio Secretary of State to state the authority of a specific party in a certain position to conduct business on behalf of a limited liability company. As such, where there is a statement of authority, it is no longer necessary to look to an operating agreement to determine who can conduct business on behalf of a limited liability company. Having a statement of authority will also limit the ability of third parties to enforce members’ and managers’ unauthorized decisions.
The Old Law did not provide for statements of authority but generally required parties transacting with a limited liability company to look to its operating agreement to determine who could conduct business on its behalf.
End of the Member-Managed and Manager-Managed Distinction
The New Law implicitly does away with the distinction between member-managed and manager-managed limited liability companies. A limited liability company no longer needs to make this distinction in its operating agreement, which was necessary under the Old Law.
Under the New Law, a manager is any party authorized to manage the activities of a limited liability company. Such a party does not need to be defined as a manager but can be called a director, officer, or anything else. This may allow for more flexible management structures, which the Old Law did not contemplate.
Mechanism for Barring Certain Claims after Dissolution
Under the New Law, when dealing with known creditors, a dissolved limited liability company may give notice of its dissolution to known creditors, setting a deadline for them to bring their claims. Such a deadline may not be less than 90 days from the date of the notice. If the known creditors fail to bring their claims within that period, then their claims are effectively barred, protecting the dissolved limited liability company from those claims.
Under the New Law, when dealing with unknown creditors, a dissolved limited liability company may now (i) publish a notice of its dissolution on its then maintained website, if any, and (ii) provide a copy of such notice to the Ohio Secretary of State for it to publish on its own website. If the dissolved limited liability company does so and requests that unknown creditors present their claims in accordance with the notice within two years from the date of publication (or if the statute of limitations runs during the two years), then those claims are effectively barred, protecting the dissolved limited liability company from those claims.
Under the Old Law, the dissolution of a limited liability company did not prevent the commencement of a proceeding against it.
The foregoing changes are only some of those seen under the New Law. If you need help navigating the New Law, it would be prudent to reach out to the Finney Law Firm. We can provide further guidance and a more in-depth explanation of the foregoing changes. Contact Jennings Kleeman (513.797.2858) for assistance with your LLC or corporate affairs.