Understanding recent changes to Ohio's LLC law

If you do business in the form of a limited liability company (LLC), you should be aware of recent changes that the Ohio Legislature made to the state's LLC law. Whether the new law will affect any particular business venture depends on the circumstances of the business arrangement, but members of LLCs and individuals contemplating forming LLCs would be wise to take note of the following changes that took effect in May.

FIDUCIARY DUTIES

The new law spells out the duties of members to one another and to the LLC, stating specifically that each member owes a duty of loyalty and a duty of care. The law also prohibits members from opting out of these duties in their operating agreements.

The duty of loyalty is defined as:

  • Accounting to the company for any property, profit or benefit derived by the member in the conduct of the company's business or derived from the use by the member of the company's property.
  • Refraining from dealing with the company as or on behalf of a party having an adverse interest to the company.
  • Abstaining from competing with the company.

A member's duty of care is limited to refraining from grossly negligent or reckless conduct, intentional misconduct or a knowing violation of law.

Although courts often applied many of these duties before the new law was adopted, they never expressly required members to avoid competing with their company. Moreover, members were able to alter their duties through the LLC operating agreement, thereby creating a business entity which provided them with the degree of protection or flexibility that was appropriate to their undertaking.

LLC members are now obligated to discharge the fiduciary duties imposed by statute, and therefore they may benefit from re-examining their operating agreement, and potentially their business structure, to ensure it still provides them with the freedom and security that are appropriate to their particular business venture without running afoul of the law.

RIGHTS OF ASSIGNEES AND CREDITORS

Other notable changes in the new act concern the assignment of membership interests in a limited liability company and the rights of creditors concerning membership interests. The law clarifies that the assignee of a membership interest is entitled to receive (to the extent assigned) only distributions of cash and other property or similar items to which the assignor would have been entitled. In other words, the assignee is not entitled to become a member or to exercise the rights of a member. The act also provides that the assignee is bound by the terms of the operating agreement even if the assignee does not sign it. In addition, the new law clarifies that a judgment creditor of an LLC member is limited to the same rights as an assignee.

These provisions define the rights of third parties and will be important to you if you are considering assignment of a membership interest or if you plan to leverage company assets in exchange for bank financing.

The aforementioned changes are only some of the ways that the Ohio Legislature has revised the limited liability company law. For further information concerning the implications that the recent changes may have on your business and for assistance evaluating your operating agreement, contact your attorney at Nicola, Gudbranson & Cooper.

—Benjamin Cooper
bcooper@nicola.com