This article is the second installment of a three-part series by Brandon Leal and Julie Vaccarelli that further analyzes "series" LLCs. The first installment provided a brief overview of some of the significant changes in the New LLC Act. The third installment will analyze other key provisions of the Act.
In 1977, Wyoming became the first state to pass legislation enabling business owners to take advantage of both liability protection and pass-through taxation through the use of a new business structure, the limited liability company ("LLC"). In less than twenty years, all fifty states passed laws permitting the use of LLCs.
Ohio's Limited Liability Company Act (Chapter 1705 of the Ohio Revised Code) became effective July 1, 1994. On January 8, 2021, Governor Mike DeWine signed the Ohio Revised Limited Liability Company Act (Chapter 1706 of the Ohio Revised Code, herein called the "Revised Act") into law. The Revised Act permits the use of "series" LLCs in Ohio, making Ohio only the sixteenth state to pass such legislation.
A series LLC offers asset protection similar to a holding company arrangement (e.g. parent LLC and its subsidiary LLCs). A holding company arrangement may be used to separate and protect assets held by a common owner or group of owners. This has traditionally been accomplished by forming or purchasing multiple business entities (subsidiaries) wholly owned by another business entity (a holding/parent company). The subsidiary business entities are used to own assets and conduct business, while the holding/parent company exists only to own interests/shares in the subsidiaries. Using this arrangement, if a subsidiary becomes subject to a claim for damages or becomes insolvent, only the assets owned by that subsidiary are subject to claims against or the liabilities of the subsidiary and both the holding/parent company and the other subsidiaries are insulated from those claims and liabilities. This holding company arrangement requires the formation of multiple LLCs, corporations, partnerships, etc., by filing forms and paying fees to the state.
The series LLC is intended to offer the asset and liability protection generated through a holding company arrangement more easily and efficiently. Under the Revised Act, Ohio business owners may create a series LLC through a single filing with the Ohio Secretary of State. To form a series LLC, the Revised Act requires that the Articles of Organization and the Operating Agreement of a series LLC must contain specific language in order to create separate series within the LLC. Each series created is separate from the LLC itself and may transact business and own assets as if it were a separate entity, though in reality it is merely a separate division or department of the LLC.
There are, however, risks associated with this series LLC structure, in no small part due it being new and Ohio courts not yet weighing in. The Revised Act requires that each series maintain records "in a manner so that the assets of the series can be reasonably identified by specific listing, category, type, quantity, or computational or allocational formula or procedure, including a percentage or share of any assets, or by any other method in which the identity of the assets can be objectively determined." This requirement may seem easy enough to meet, however, one of the many benefits of LLCs has historically been the less stringent recordkeeping requirements as opposed to corporations and it is quite common for business owners to neglect such recordkeeping requirements whether for corporations or LLCs. Therefore, any business owner that chooses to utilize Ohio's new series LLC must take special care to maintain the records of each series diligently or risk losing the benefits of insulating the assets of one series from the liabilities or claims of other series or the LLC itself.
In the last article of this series, we will provide further analysis on other key provisions of the Revised Act. In the meantime, please consider contacting your WHP counsel today to ensure that your operating agreement is updated and ready for when the New LLC Act becomes effective.
This article provides an overview and summary of the matters described therein. It is not intended to be and should not be construed as legal advice on the particular subject.