Originally set to become effective starting January 2022, Ohio’s new LLC Act will now become effective February 11, 2022. While this article will not discuss the numerous changes to the statute exhaustively, it will discuss some of the changes that will allow business owners to form and operate a “Series LLC.”
What is a Series LLC?
In general, the Series LLC offers a considerable amount of flexibility on how the owners of the LLC may conduct business. It permits owners to maintain separate assets within a single business entity while reducing the need to create additional entities with the Secretary of State.
Traditionally, a non-series LLC limits the owner’s liability to the specific assets owned by that LLC. In other words, if the owner of the LLC wanted to isolate certain assets within the LLC from other assets, the owner would need to form multiple LLCs (either as separate entities owned by the owner or using a holding company structure whereby the owner owns the holding company and the holding company owns separate subsidiary LLCs). In this situation, each LLC owns assets separately and operates different lines of business. Each separate LLC must be formed with the Ohio Secretary of State.
In contrast, a Series LLC can take the structure mentioned above and essentially consolidate it within one single Series LLC, meaning just a single filing with the Secretary of State.
The Series LLC has the ability to have separate “cells” within it. Each cell within a Series LLC can segregate the liability of the assets owned by that particular cell from the assets in every other cell within that same Series LLC.
If properly implemented, the creditors of one cell within the Series LLC cannot reach the assets of another cell within that Series LLC. The Series LLC is like the parent LLC in a holding company structure, while each cell within the Series LLC essentially operates like a subsidiary of the parent entity.
It is important to note the holding company structure – a single parent entity with multiple subsidiary LLCs – is still a valid structure under Ohio law. The Series LLC offers another option for structuring your LLC in the future. A business owner who wants to change its existing parent/subsidiary structure into a Series LLC can do so by merging the subsidiaries with the parent entity and amending the surviving entity’s articles of organization and operating agreement to comply with the new requirements for a Series LLC.
How do I form a Series LLC in Ohio?
A Series LLC has certain requirements per the new LLC statute:
- The paperwork filed with the Secretary of State must state the LLC may have one or more series of assets.
- The operating agreement for the Series LLC must have certain elements, including either or both of the following:
• Separate rights, powers, or duties with respect to specified property or obligations of the LLC or profits and losses associated with specified property or obligations.
• A separate purpose or investment objective.
- At least one member must be associated with each cell within the Series LLC.
Also, it should be noted that the records for the Series LLC must be kept separate for each cell within the Series LLC. The Ohio Revised Code provides a little guidance on record keeping, noting that: “[i]f the records of a series are maintained in a manner so that the assets of the series can be reasonably identified by specific listing, category, type, quantity, or computational or allocational formula or procedure, including a percentage or share of any assets, or by any other method in which the identity of the assets can be objectively determined, the records are considered satisfactory.” It is not clear what constitutes “reasonably identified.” However, it is crucial to diligently keep records of which cell in a Series LLC contains which particular assets, so as not to lose the liability protection within the Series LLC, which is one of the primary purposes of this structure.
What does the membership and management of the Series LLC look like?
It is not required that the membership and management for every cell within a Series LLC be identical. This added flexibility is another upside for structuring your business as a Series LLC. If an LLC has multiple members, some may be associated with (and members of) one or more cells within the Series, and some may be associated with every cell within the Series. It is required that any individual cell within a Series LLC has at least one member associated with it. It is also possible for a member to become disassociated with (and no longer a member of) a particular cell within a Series LLC but still maintain association with any of the other cells within the Series LLC. It is also important to note that only those members who are associated with a particular cell of a Series LLC have rights to oversee the activities of that cell within the Series LLC. Additionally, only those members associated with a cell may participate in that cell’s distributions, whether ordinary or liquidating distributions.
While there are benefits to a Series LLC, that does not mean a Series LLC is the right option for your business. If you have any questions about the Series LLC, don’t hesitate to get in touch with your Carlile Patchen & Murphy attorney.