How to Form an LLC in Ohio!

Ohio LLC names must include “limited liability company” or one of the shorter options “L.L.C.,” “LLC,” “limited,” “ltd,” or “ltd.” The only other name requirement is that the name must be distinguishable from every other business entity name in Ohio, including those formed there and those qualified to do business there (including trade names).

A prospective Ohio LLC must have articles of organization filed with the Secretary of State to officially exist. These articles of organization, which can be filed by any person, only needs to include the LLC name, the duration of the LLC (which can be perpetual), the name and address of the registered agent, and a signed acceptance from the registered agent. Any other provisions that the organizer decides to include can also be on the articles of organization.

An operating agreement will govern the internal affairs of the LLC and determine how the LLC carries out its business. The operating agreement will bind the LLC and members, whether or not the members actually execute it. Unlike many other states, Ohio defines the operating agreement as “all of the valid written or oral agreements of the members,” meaning that the operating agreement is much more encompassing in Ohio.

EIN: If an Ohio LLC plans on hiring employees, or if it has multiple members, it will need to contact the I.R.S. (or, alternatively, hire an incorporation service like Incnow) to obtain an EIN.

Annual Report: Ohio does not require LLCs to file any type of annual report. However, Ohio does have a commercial activity tax on businesses with over $150,000 in gross receipts.

The Ohio LLC Code gives LLC members contractual freedom to customize their contributions, rights, duties, and distributions of profits and losses.  In addition, it provides that an LLC’s existence can outlive its members’ lifetimes, and it protects both majority and minority members’ membership interests.

Ohio Has a Large and Growing Economy

Each year, Ohio forms over 40,000 new LLCs.  Ohio has over 258,000 active LLCs.  Ohio is the seventh largest state by population and eighth largest by gross domestic product.  According to the U.S. Chamber of Commerce, Ohio ranks as the third best tax environment for new firms.

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.

Formation

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.

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.

Dealing with 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.

Preventing Unwanted Business Partners

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 Only Get Passive Rights, Not Control 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.”

An Ohio LLC must continuously maintain an agent for service of process in the state.  A commercial registered agent service may act as an Ohio registered agent.

Because of the advantages of forming an LLC in Ohio, over 40,000 new LLCs are formed in the state each year. Should you wish to have more flexibility and protection, you may instead form a Delaware LLC even if you operate in Ohio.  What are the advantages of a Delaware LLC?  (Delaware LLC Advantages).  We can then help you file an application for registration to do business in Ohio with your Delaware LLC (Form Delaware LLC).