This article is the third installment of a three-part series by Brandon Leal and Julie Vaccarelli that analyzes other key provisions of the New LLC Act. The first installment provided a brief overview of some of the significant changes in the New LLC Act. The second installment further analyzed "series" LLCs.
As was discussed in the previous two articles of this series, the Ohio Revised Limited Liability Company Act (Chapter 1706 of the Ohio Revised Code, herein called the "Revised Act") will go into effect January 1, 2022, and will repeal the existing statutes completely (Chapter 1705 of the Ohio Revised Code). In part 2 of this series, the addition of the "series" LLC was reviewed. It is important that existing LLCs become familiar with the remainder of the Act as well.
In this last installment of the three part series, we will review the remainder of the changes including: penalties for failing to comply with operating agreement; expansion/reduction of fiduciary duties; cancellation for failure to maintain a statutory agent; and the elimination of Member/Manager Management Distinction.
Penalties For Failing to Comply With Operating Agreement
In contrast to the old version, the Revised Act contains specific penalties and consequences for breaching the Operating Agreement. Members may be subject to penalties for breach including: (1) reducing a member's interest in the LLC; (2) forcing a sale of a member's interest; or (3) defining a valuation and forcing a sale or redemption. This was not formerly an option and adds a level of responsibility for the LLC members.
Expansion/Reduction of Fiduciary Duties
The Revised Act establishes a baseline for the fiduciary duties that apply to members and managers. In a member-managed LLC, the members owe each other a duty of loyalty and care. In a manager-managed entity, the members owe to each other and the LLC only the duty of good faith and fair dealing. The manager in a manager-managed LLC owes the duty of loyalty, care and good faith and fair dealing to both the members and the LLC. The Revised Act allows for modification of the duties in the Operating Agreement.
Cancellation For Failure to Maintain a Statutory Agent
Statutory agents have always been required in Ohio, however, the Revised Act imposes statutory penalties on LLCs that fail to continuously maintain, or fail to update the name or address of, the statutory agent. The Secretary of State is directed by the Revised Act to cancel an Ohio LLC's articles, or a foreign LLC's Ohio registration, for failing to maintain a statutory agent after providing the LLC with notice and a 30-day opportunity to cure. The rigidity of the requirement is quelled by a process for reinstatement upon the appointment of a new statutory agent.
Elimination of Member/Manager Management Distinction
Currently, LLCs can be structured as either member-managed or manager-managed (See R.C. § 1705.25). The authority of members' and managers' is specifically enumerated in an LLC's operating agreement. Although the Revised Act eliminates the distinction between member-managed and manager-managed, it preserves the terminology by defining "Manager" as "any person designated by the limited liability company or its members with the authority to manage all or part of the activities or affairs of the limited liability company" (See R.C. § 1706.01(O). The Revised Act provides instead that a person's ability to act as an agent, and bind the LLC, can be authorized by: (1) the operating agreement; (2) decisions of the members in accordance with the operating agreement; (3) a "statement of authority" filed with the Ohio Secretary of State; or (4) the Revised Act's "default" rules. Flexibility for each LLC to be structured as management chooses is the goal of the change.
This last article in the three part series has briefly touched on the remaining changes in the Revised Act. To further discuss if your Operating Agreement needs revision, contact your Wickens Herzer Panza attorney.
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.