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A Guide to Ohio’s new Limited Liability Corporation rules

Laura Newpoff
For Columbus CEO
Rebecca Schrote, associate, Steptoe & Johnson

The concept that undergirds America’s most popular business entity can be traced to a court case called “The Rebecca” that began more than 200 years ago. IncNow reports that this was the first time U.S. courts established the principle of limited liability. If you invested in a shipping sailboat that was about to cruise across the ocean and problems like running into another ship arose, you would be liable for paying only up to the amount of your investment—no more. The goal was to encourage commerce by limiting risk.

It would take until 1977, however, for the limited liability company to be birthed out of the Wyoming state legislature. It was conceived as an alternative to the corporation, which taxed both corporate profits and profit distributions to shareholders. As pass-through entities, LLCs became a way for their members to avoid double taxation.

In Ohio, LLCs have been around since 1994 and their growth has been exceptional. According to the Ohio State Bar Association, more than one million LLCs have been formed; just over 130,000 were created in the first 10 months of 2021 alone. As a result, the original LLC Act has become one of the most referenced statutes for business lawyers. Those rules got a refresh when the Ohio Revised Limited Liability Company Act became effective Feb. 11.

New changes to Ohio's LLC rules

According to Steptoe & Johnson PLLC, the Ohio Revised LLC Act contains several important new provisions:

  • Imposes new fiduciary duties on members and managers of LLCs. These changes may alter the ability of the company or its members to recover for breached duties.
  • Provides default rules enforcing equal per capita distributions among members and equal per capita votes by members on ordinary business matters. 
  • Lists certain specific statutory requirements that cannot be changed by the provisions in an operating agreement. 
  • Allows for the formation of “series” LLCs within one LLC, which operates similarly to a corporate, parent-subsidiary structure.
  • Permits the management of an LLC to be structured in ways other than only member-managed or manager-managed.
  • Provides a framework by which a dissolved LLC may bar creditors’ claims after a certain period if certain statutory requirements are followed.
  • The act enables an operating agreement to provide penalties that will apply if a member violates certain provisions in the operating agreement.

Rebecca Schrote, an associate at Steptoe & Johnson, says the act gives business owners more flexibility. New options like series LLCs allow them to form subsidiary-like entities, or a “series,” instead of having to create a separate LLC for multiple companies. If one series gets sued, the other series under the LLC are shielded from liability. Ohio is now one of just 16 states that allow the formation of series LLCs.

While the new act doesn’t necessarily invalidate existing LLC operating agreements, those agreements can harm the LLCs in litigation if they fail to address issues that are subject to new rules in the act, like fiduciary duties, voting and distributions. The act also provides new features like the management structure and penalty provisions. To take advantage of those new features, LLCs should have its operating agreements updated by an attorney.

“Even before the [Ohio Revised LLC Act], a LLC’s governing business documents should get checked regularly,” Schrote says. “If your operating agreement is unclear or doesn’t have something in it that it needs to have and then litigation happens, you are stuck with whatever is spelled out in that agreement.”

Dissociation and indemnification rights

Christopher Gordon, litigator at Bricker & Eckler

As a litigator at Bricker & Eckler, Christopher Gordon foresees some changes in the scope of litigation among feuding LLC members. For example, the new act replaces the concepts of withdrawal, expulsion or removal of a member under the former LLC statute with the concept of “dissociation.” Dissociating a member means the member can no longer participate in the activities and affairs of the LLC but is still entitled to receive distributions. While many circumstances for dissociation remain unchanged, the new law’s rule provides for dissociation through litigation.  

There are several circumstances where an LLC can ask a court to dissociate a member of a LLC, including when “the person has engaged, or is engaging in wrongful conduct that has adversely and materially affected, or will adversely and materially affect the limited liability company’s activities.” He says this could be a prime spot for litigation in the fight for control of businesses where the members have an intractable dispute. For example, the statute permits anyone with authority to act on behalf of the LLC to ask the court to dissociate a member.

“You need to address in your operating agreement how those disputes will be resolved because while using this tool in litigation may be your only option, it will be more cost-effective to deal with these issues when drafting or amending the operating agreement,” Gordon says. 

The new law also says “a person shall not voluntarily dissociate from a limited liability company,” a default provision that is different from the old law that allowed a member to withdraw at any time. Under Section 1706.411 (A), however, an operating agreement can create an avenue for voluntary dissociation.

Justin Cook, tax and corporate attorney, Bricker & Eckler

Justin Cook, a tax and corporate attorney at Bricker & Eckler, says operating agreements also may need to be adjusted to spell out the details of indemnification rights for members, managers, officers and other agents. “While providing indemnification rights in organizational documents is important for attracting qualified people to manage your company’s activities, it is equally important to understand the scope of your commitments,” he says. 

Default statutory rules under the old law required that individuals seeking indemnification from a company for liability incurred while acting on its behalf to have acted in a manner that is “not opposed” to the best interests of the company. The new law eliminates this standard and simply states that limited liability companies may provide indemnification. As a result of this law change, trouble may arise for existing LLCs formed under the old law if their operating agreements require that they provide indemnification to the fullest extent permitted by Ohio law. The new law would result in substantially greater indemnification obligations for the company and potentially lead to liabilities. 

Laura Newpoff is a freelance writer.