Forming an LLC in Ohio can provide a number of legal benefits.
Freedom of Contract
The Ohio LLC Code gives LLC members contractual freedom to customize their capital contributions and their shares of profits and losses. It states that “[t]he profits, losses, income, gains, deductions, credits, or similar items of a limited liability company shall be allocated among the members and classes of members in the manner provided in writing in the operating agreement.” This gives members contractual flexibility to adapt their income streams and risks of loss to further their broader asset management plans.
Privacy for Members
The Code does not require filing of members’ names. A “person” may form an LLC by filing its articles of organization, and the definition of “person” includes almost any kind of business or legal entity. An LLC’s members may therefore have an entity or person who is not a member file the LLC’s articles of organization with the Ohio Secretary of State.
Perpetual Duration
The Ohio LLC Code provides for an LLC’s unlimited life. It states that “[i]f the articles of organization or operating agreement do not set forth the period of the duration of the limited liability company, its duration shall be perpetual.” An LLC’s existence can therefore outlive its members’ lifetimes.
Benefits for Business Partners
The Code enables members to create classes of membership. An LLC agreement may establish classes of membership interests with different rights, powers, and duties, including voting and non-voting interests. This facilitates everything from complex, high-dollar-volume transactions to succession planning in family businesses and estate planning by gifts of non-voting interests.
The Ohio LLC Code is somewhat unusual in that it expressly authorizes LLCs to adopt bylaws in addition to an LLC agreement. It states an LLC’s members or managers “may adopt bylaws that are not inconsistent with the articles of organization or the operating agreement and that are for the regulation of the members, the managers, or any other matter affecting the management of the company, including, but not limited to, books and records of account, minutes of proceedings, meetings, requirements for notices of meetings, computation of time for notice, method of giving notice, quorum requirements, written action in lieu of a meeting, waiver of notice, proxies, and officers.”
The Ohio LLC Code gives members contractual freedom to customize the duties each party to the LLC agreement owes to the other parties. The Code provides that “[t]he only fiduciary duties a member owes to a limited liability company and the other members are the duty of loyalty and the duty of care set forth in [section 1705.281].” Section 1705.281 defines the specific requirements of both duties, which are based on the comparable provisions of Ohio’s partnership law. The Committee Comment to the 2012 amendments states the section “is a complete and exclusive statement of the fiduciary duties of members,” unless “the operating agreement or other agreement creates additional duties.” That is, an LLC agreement may increase, but not decrease, duties.
Sections 1705.282 and 1705.29 define the duties of member and non-member managers. They state that unless the LLC agreement provides otherwise, non-member managers owe only “the duties to act in good faith, in a manner the manager reasonably believes to be in or not opposed to the best interests of the company, and with the care that an ordinarily prudent person in a similar position would use under similar circumstances.” Managers who are also members owe both the duties of members and the duties of managers.
The Code provides that although an LLC agreement cannot eliminate the fiduciary duties in section 1705.281, “the operating agreement may identify activities that do not violate the duty of loyalty, and prescribe the standards by which the duty of care and duty of good faith and fair dealing are to be measured.” In addition, section 1705.31 provides “safe harbor” provisions for “interested” transactions, which are transactions between an LLC and one or more of its members or managers.
The result is the LLC Code protects both majority and minority members. The Code protects minority members because an LLC agreement may not completely eliminate fiduciary duties, even though it may identify activities that do not violate them and prescribe standards for measuring them. These provisions make minority interests safer investments and therefore more valuable.
The Code protects majority members because it provides “safe harbors” to facilitate contracts and transactions between an LLC and one or more of its managers or members, or an entity in which they own an interest, if the contracts or transactions meet minimum disclosure, approval, or fairness requirements. These rules give majority members and the LLC certainty in business planning and the ability to take advantage of mutually beneficial opportunities.
Protections Against Unwanted Parties
The Ohio LLC Code allows members to protect their control of an LLC. An LLC agreement may prohibit members from assigning their membership interests. But if an LLC agreement does not prohibit it, an assignment does not dissolve the LLC or entitle the assignee to become a member. Instead, the assignee may only receive the allocations of profit and loss and distributions to which the assignor would have been entitled, and all the other members must consent to the assignee becoming a member.
Creditors Cannot Obtain Controlling Rights
In addition, the Code states that unless an LLC agreement provides otherwise or all members give written consent, a person ceases to be a member of an LLC when the person makes an assignment for the benefit of creditors, files a voluntary petition in bankruptcy, is adjudicated insolvent or bankrupt, or fails to contest a petition seeking his or her reorganization, liquidation, dissolution, or similar relief. These events are considered “events of withdrawal.”
If a judgment creditor of a member obtains a charging order against the member’s membership interest, “the judgment creditor has only the rights of an assignee.” Furthermore, a charging order is a judgment creditor’s “sole and exclusive remedy.”
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