On January 8, 2021, Governor Mike DeWine signed into law the Ohio Revised Limited Liability Company Act, (the “New Act”) which completely replaces the existing law.
The New Act became effective on April 12, 2021, but it is not applicable to all LLCs until January 1, 2022. On January 1, 2022, the New Act will govern all LLCs, even if the LLC was formed before the New Act.
Business owners and investors should begin to familiarize themselves with the New Act and to consider whether any of their organizational or management documents should be modified in light of the changes.
The highlight reel:
The New Act is intended to be a default provision (i.e., you can make up your own rules, to a certain extent and within reason).
Let me say it again – the New Act will only ever apply to you IF you do not make up your own provisions about how to govern your company. And, when I say “make up your own provisions” I mean, pay an attorney to help you make up your own comprehensive rules that make sense for you and your company and don’t have unintended consequences.
Governance structure flexibility—do what you like…within reason!
Ohio’s existing law insists that an LLC must either be manager managed or member managed. This distinction is often confusing, and, more often than not, unnecessary. The New Act eliminates this tedious distinction and makes it so an LLC’s operating agreement can describe the governance structure without categories. In short, members of an LLC can decide to implement a form of governance that is more like a for profit corporation or partnership, such as a board of directors or an oversight committee.
Ability to eliminate fiduciary duties, (i.e., you can make your own agreements about being “loyal” and using “reasonable care.”)
Currently, members of an LLC can scale back the applicability of certain fiduciary duties, but they generally cannot entirely eliminate them. For example, members of an LLC will now have the ability to structure an LLC so that certain members or all members will have additional ability to “compete” with the company or devote time to another business that competes with the company. The only non-waivable fiduciary duty is that members must abide by the implied covenant of good faith and fair dealing.
Yep, the rules you put in place for your company are NOT meant to be broken!
Now, members can agree to certain penalties and consequences for many “worst case scenarios.” For example, if a member breaches an operating agreement or upon the occurrence of a certain event, penalties can include:
Reducing or eliminating a member’s interest in the company
Forcing a sale of a member’s interest
Fixing a value of the defaulting member’s interests in the LLC by formula or appraisal and forcing a redemption sale at that price.
This allows minority members to maintain some control. A common situation where a penalty may be useful is in the context of a capital call or a call option where the LLC and other members have the option to purchase the interests of a member upon the occurrence of certain events.
Series – this is a nifty additional protection for LLCs.
The New Act allows for business owners who want to have cash or assets invested in different segments of an LLC to keep those assets/capital protected from claims against, or liabilities incurred by, other segments of the LLC. The New Act allows an LLC to establish “series” in which assets of each series are protected from claims and liabilities incurred by another series or the LLC as a whole.
Protections against creditors or members, AKA “Keep your mitts off my business.”
Keep your hands off my business! The New Act includes provisions that are designed to protect an LLC from the claims of creditors against members, including where a creditor claims a security interest in a member’s interest in the LLC.
Ability to stop claims after dissolution of the company.
What?! Under the New Act, an LLC will have a way to cut off claims of creditors after a certain period of time following the LLC’s dissolution. Sounds great, if you are the debtor! In order to gain this protection, you must:
Provide notices to your creditors at the time of winding up stating that the creditor must bring the claim by a certain deadline, not less than 120 days from the effective date of notice; and/or
Publish a note on the LLC’s website and provide a copy to the Ohio Secretary of State for publishing on its website for the purposes of notifying creditors that any claim not brought against the LLC within 2 years of publication will be barred.
Contact Wick Law to see how the changes in the law could benefit your company!
Wick Law, LLC is a small business legal practice, representing owners, investors, and entrepreneurs in all aspects of commercial, corporate, and business law, estate planning, contracts and negotiations, business litigation, and real estate. For more information: Contact 614-572-6366, visit www.mwicklaw.com, or email us at firstname.lastname@example.org. Wick Law, LLC is located in Columbus, Ohio.
(Materials in this article have been prepared by Wick Law, LLC for general informational purposes only. This list is for educational purposes and is not to be considered exhaustive. More items could be added to this checklist based upon the type of transaction or industry standards. These materials do not, and are not intended to, constitute legal advice. The information provided is not privileged and does not create an attorney-client relationship with Wick Law, LLC or any of the firm’s lawyers. This checklist is not an offer to represent you. You should not act, or refrain from acting, based upon any information in this checklist. Wick Law, LLC maintains offices in Columbus, Ohio, and has lawyers licensed to practice in Ohio and in the United States District Court, Southern District of Ohio. The firm does not intend to practice law in any jurisdiction where the firm is not licensed.)
Copyright ©2021 Wick Law, LLC. All rights reserved.