Ohio Limited Liability Companies
Chapter 1705 of the Ohio Revised Code governs the formation, operation and dissolution of LLCs in Ohio.
Combining certain characteristics of both partnerships and corporations, LLCs are privately owned legal entities that can be formed for the purpose of earning profits, pursuing a social mission, or both, although some states require an LLC to be formed only for a “business purpose.” LLCs differ from for-profit corporations because they are formed and owned by members rather than shareholders; however, like S corporations and partnerships, LLCs are eligible for pass-through income tax treatment. This means that income and expenses are reported as though the members incurred them directly, and profits or losses are taxed at the ownership (member) level, rather than the entity (company) level.
Members of LLCs can be individual investors as well as for-profit corporations and tax-exempt nonprofit corporations. For this reason and also because of pass-through taxation which eliminates “double taxation” (the effect of taxing income at the corporate level and again when it is included in the owner’s income), LLCs are preferred over for-profit corporations as vehicles for social enterprise, especially for joint ventures between a tax-exempt nonprofit with a social change mission and a for-profit business.
LLCs are akin to partnerships because the members have broad discretion to allocate profit and loss and management powers among themselves (via an “operating agreement”). On the other hand, as with the shareholders of corporations, the members of an LLC can be divided into classes, each with its own economic rights, and members have limited personal liability (discussed below).
Two states, Tennessee and Kentucky, specifically authorize the formation of nonprofit limited liability companies (nonprofit LLCs). The statutes of numerous states, including California, have language that permits nonprofit LLCs to exist. Assuming state laws permit formation of nonprofit LLCs, the IRS will recognize such an LLC as exempt under Section 501(c)(3) if it elects to be treated as a separate legal entity for tax purposes and its operating agreement includes the language mandated by the organizational test (purposes, distribution of assets upon dissolution, etc.) and it meets numerous requirements largely designed to guard against inurement and private benefit. These conditions will be discussed in the Nonprofit Taxation section.
Individuals and all forms of entities may form LLCs. This includes partnerships, limited partnerships, trusts, estates, associations, corporations, fiduciaries, or others acting on their own or in a representative capacity. A single member may form an LLC without another member. Members can form an LLC regardless of the person’s residence, domicile, or state or organization. The filing fee is $125.00.
Members must sign and file “articles of organization” with the Secretary of State. The principal office of the LLC does not need to be located in Ohio. However, the LLC must maintain an agent for service of process in Ohio. The agent must be an individual resident of Ohio, a domestic corporation, or a foreign corporation holding a license as a foreign corporation under Ohio law. The articles of organization must be accompanied by a written appointment of an agent for service of process that is signed by an authorized member, manager, or other representative of the LLC and must contain a written acceptance of the appointment signed by the agent.
The name of the LLC must include the phrase “limited liability company” or an accepted abbreviation: LLC, L.L.C., ltd, ltd., or limited. The name must be distinguishable from all other limited liability companies, corporations, limited liability partnerships, and limited partnerships registered with the state or trademarked unless the other entity files consent to use of the name.
The purpose of the LLC may be for any legal for-profit or nonprofit purpose.
Example articles of organization for Buckeye Partners Ltd. can be found at: http://www2.sos.state.oh.us/reports/rwservlet?imgc&Din=200026401342.
Management and Control
Typically, an LLC “operating agreement” among the members governs the management of an LLC. The operating agreement—which is like the articles of incorporation, bylaws and a shareholder agreement all in a single document— may contain provisions requiring adherence to a social purpose and such purpose and the values it embodies may be interwoven throughout the operating agreement.
The operating agreement of the LLC is all of the valid written and oral agreements of the members. For a single member LLC, the operating agreement is a written declaration of the member as to the affairs of the LLC and the conduct of its business.. The operating agreement may grant all or certain members the right to vote. Unless the operating agreement provides otherwise, the members retain management authority.
Additional members may be admitted to the LLC in compliance with the operating agreement. If the operating agreement does not have provisions for admitting additional members, a member may be admitted upon written consent of the other members. Members may only withdraw at times and events specified in the operating agreement.
The operating agreement may allocate profits, losses, income, gains, deductions, credits, or similar items among the members. If the operating agreement does not allocate these items, the allocation will be made in proportion to their contributions to the capital of the LLC. Distributions of cash or other property to members shall be made as allocated in the operating agreement. If the operating agreement does not provide for allocation of distributions, the distributions will be allocated in proportion to the capital contributions of each member.
Limited Liability of Members and Managers
Members are not liable for the debts, obligations, and liability of the LLC.
Merger, Dissolution and Term of Existence
LLCs may be merged into another entity or have another entity merged into it. LLCs may also merge with another entity into a new entity. If the management is not reserved to the members, the management must adopt the merger by the percentage required in the operating agreement or a unanimous vote. Likewise, if management is reserved to the members, members must adopt the merge by a unanimous vote or the percentage of member approval required in the operating agreement. All members, including members without the right to vote, must be given written notice of the merger.
LLCs are dissolved upon the occurrence of any of the following events: the expiration of any period fixed by the operating agreement or articles of organization for the company’s duration, one or more events specified in the operating agreement in writing as causing dissolution, or the unanimous written agreement of all members to dissolve the company. LLCs may also be dissolved by a judicial dissolution. Upon dissolution, the LLC shall wind up its affairs by liquidating its assets and making reasonable efforts to pay all claims and obligations.
An LLC offers the same flexibility in raising capital as a for-profit corporation.
Recordkeeping and State Reports
The LLC must keep the following records at its principal office: a current list of the full names and address of each member, a copy of the articles of organization with all amendments, any written operating agreement with its amendments, copies of any tax returns for the three most recent years, and copies of any financial statements for the three most recent years. The LLC also must keep a written operating agreement or separate writing that includes: the amount of contributions of each member, when additional contributions have been agreed to be made, rights of members to receive distributions, and each event that will cause the company to be dissolved.
Unless it elects to be treated for federal purposes as a corporation, an LLC is generally not subject to separate entity-level taxation of its income under federal tax laws, although it is required to file an informational return. Unless a member is exempt from income taxation, usually its distributive share of membership income and loss is treated as income or loss to the member and reported on his/her/its return, regardless of whether the member actually receives the income. LLCs that have one owner are generally disregarded as entities separate from their owners.
Humphreys, Thomas, Limited Liability Companies and Limited Liability Partnerships (Incisive Media, 2009)