July 22, 2021 / Law Alert

Changes to the Ohio LLC Act and series LLCs for real estate purposes

The introduction of series limited liability companies (LLCs) into the provisions governing LLCs under the Ohio Revised Code will be very important for Ohio companies operating for real estate purposes. While other changes are also important to consider, series LLCs will provide a new flexible vehicle for Ohio companies that hold and invest in real property assets.

Chapter 1705, the current chapter of the Ohio Revised Code (ORC) governing limited liabilities companies will be repealed, effective Jan. 1, 2022, to make way for the Ohio Revised Limited Liability Company Act (Ohio LLC Act) adopted earlier this year under Chapter 1706 of the ORC. The new chapter will modernize Ohio’s LLC law similar to many other states and is based largely on the Prototype LLC Act developed by the LLCs, Partnerships and Unincorporated Entities Committee of the American Bar Association Section of Business Law. The new chapter preserves many concepts of the current chapter to prevent existing LLCs from needing to make significant changes in response to the new chapter going into effect, but introduces many new concepts. One notable change, the addition of “series LLCs,” could affect how existing and new LLCs may wish to be organized, especially those formed primarily for real estate purposes.

In Ohio, the holding company structure is a common vehicle used by businesses whose primary purpose is centered around real estate. In this structure, one parent LLC is composed of different members – usually one management entity used to manage the business -  and a collection of separate subsidiary LLCs each used to hold different properties in the names of those LLCs. The parent LLC’s operating agreement can then be used to administer profits, liabilities and other obligations of the business regarding the operation of those properties. Similar to how a conventional LLC can be used to protect individual person-members from personal liability, by holding properties in this structure the parent LLC can operate a single business while protecting each of its properties as individual assets in the event one of its subsidiary LLCs faces legal liability. For example, if a lawsuit arises against one subsidiary LLC, typically the challenger can only look to the assets of that LLC and not any of the other properties of the parent LLC held in the names of its other subsidiaries. This structure can effectively shield different assets while allowing the business to operate as one entity. It was born out of the creative efforts of legal professionals responding to early LLC statutes and therefore can be cumbersome to organize since it was not originally contemplated by LLC laws.

ORC Sections 1706.76 – 1706.7613 of the new chapter authorize the formation of “series LLCs” and govern their operation. A series LLC is a form of LLC that can establish one or more “series” of assets organized under only one parent LLC, with each series (and its assets) being shielded from the liability of other series and the company generally. This form of LLC was originally implemented by other states when modernizing those states’ LLC laws.

To take advantage of this structure under Ohio’s new chapter, a company’s operating agreement must expressly contemplate this series structure and must provide for each series to have:

  1. Separate rights, powers or duties with respect to specified property or obligations of the LLC or profits and losses associated with such specified property or obligations; and/or
  2. A separate purpose or investment objective.

Additionally, at least one member of the company must be associated with each series. Under this structure, the debts, liabilities and obligations of a specific series are enforceable only against the assets of that series and are not enforceable against the assets of the company generally or any other series under that company. Similarly and conversely, none of the debts, liabilities or obligations of the company generally or any other series are enforceable against the assets of that specific series. To maintain these protections for the company and each series, the company must continuously meet the following conditions:

  1. The records maintained for each series must account for the assets of that series separately from the other assets of the company or any other series
  2. The company’s operating agreement must expressly provide for limited liability between its separate series
  3. The company’s articles of organization must contain a statement that the company may have one or more series of assets subject to these limitations

In the real estate context, series LLCs can be very useful. Unlike the holding company structure (which requires multiple LLCs), the series LLC structure under the new chapter requires only one series LLC. The series LLC can create separate series to hold each property asset and will protect those assets against liability through the use of this series structure, rather than holding each property in a separate subsidiary LLC. Similar to the purpose of the holding company structure, if a lawsuit arises in connection with one of the properties held in a specific series, the company and its other properties would not be at risk by virtue of that lawsuit.

So what about an existing business using a holding company structure to manage its properties? The new chapter will still permit these existing structures (for example, a “member” may still be an entity and a member will not liable for a debt, obligation or liability of the company) and there is plenty of existing case law governing this effect. However, if an existing business using the holding company structure wants to take advantage of the series LLC structure under the new chapter, one solution would be to merge each of the subsidiary LLCs into the parent LLC, and revise the operating agreement for purposes of a series LLC in accordance with the new chapter. ORC 1706.71 provides for the conditions that must be met in order to effect a merger and ORC 1706.713(3) expressly provides that property owned by each subsidiary company would vest in the surviving parent LLC without reservation or impairment.

Apart from the addition of series LLCs, the new chapter includes at least two other changes that are notable for businesses formed for real estate purpose: Changes to management structure and authority and provisions applying to foreign LLCs.

The current chapter permits LLCs to be organized as member-managed or manager-managed. Conversely, the new chapter takes a new approach by instead providing that a person’s ability to bind the LLC can be authorized by:

  1. The operating agreement;
  2. The decisions of members in accordance with the operating agreement;
  3. A statement of authority filed with the Ohio Secretary of State; or
  4. The default rules otherwise provided under the new chapter.

This effectively removes the member-managed and manager-managed distinction and provides more flexibility for an LLC to manage its business. For example, a company could use its operating agreement to establish a mechanism for a board to make decisions, rather than referring to members or managers specifically. In the real property context, this will be provide more flexibility for any company to duly authorize dealings with real property.

The new chapter also provides new provisions governing how foreign LLCs will be treated in Ohio. Notably, in order for a foreign LLC to “transact business” in Ohio, it must register with the secretary of state. However, ORC 1706.512 provides a list of what does not constitute “transacting business” in Ohio, which specifically includes merely owning real property. Effectively, these statutes clarify that a foreign LLC will not face statutory liability for failure to register in Ohio if it merely owns real property in the state. This can be important for companies organized in foreign jurisdictions and owning real property in Ohio, as well as domestic owners who organized their companies elsewhere (like Delaware or a neighboring state).

The introduction of series LLCs into the ORC may be the most significant addition for LLCs operating for real property businesses in Ohio. Other changes are also important to consider in this context, but the new chapter will at least be a great step in the direction of modernizing Ohio’s limited liability company law.

For more information, contact any member of Porter Wright’s Real Estate practice group.