As a business owner of a limited liability company, your operating agreement is one of the most important legal documents you have. It outlines how your business is run, how decisions are made, and what happens if there are any disputes or changes in ownership. However, many business owners in Ohio fail to update their operating agreements as their business evolves (or even establish an operating agreement), which can lead to serious legal and financial consequences.
Here are some reasons why you should have operating agreements drafted or updated:
Changes in Ownership
If your business has gone through any changes in ownership, such as bringing on new owners or investors, it is important to update your operating agreement to reflect these changes. This ensures that everyone is on the same page regarding decision-making, profit-sharing, and other important issues.
Change in Laws
If your operating agreement is outdated or does not comply with state law, you could face legal and financial consequences. There have been two significant changes that have resulted in the potential need to update your operating agreement. The first change came in February 2022, when Ohio’s Revised Limited Liability Act became effective (“Act”). The second change is set to be effective January 1, 2024, when beneficial ownership reporting will be required by the Corporate Transparency Act.
Ohio revised the Act effective as of February 2022. The Act used to be in Chapter 1705 of the Ohio Revised Code but is now set forth in Chapter 1706. The Act changed the law which may affect operating agreements drafted prior to the effective date. It is common for an operating agreement to reference a specific section of the Code, which may no longer be up to date and may lead to inconsistencies. The Act also eliminated certain differences between manager managed and member managed entities, as well as providing for Series LLCs. These are just a few of the reasons you may want to update your operating agreement.
The next change in law will occur when the Corporate Transparency Act (“CTA”) becomes effective. The CTA will require certain businesses to report to the Financial Crimes Enforcement Network (“FinCEN”) the beneficial owners of the entity. The CTA will affect most small businesses. There are steep penalties for failing to report timely and accurately beneficial ownership information to FinCEN. For this reason, it is a good idea to update your operating agreement to require all beneficial owners to provide the necessary information and also designate the member, officer, or manager who will be reporting the information to FinCEN as well as making sure updates are made in time.
Preparation for Future Success
An updated operating agreement can also help you plan for the future success of your business. It can include provisions for future expansion, investment, and ownership changes. By having a clear and updated operating agreement, you can help ensure that your business is well positioned for growth and success.
In summary, updating your operating agreement is an important step in protecting your business and ensuring its long-term success. By working with a qualified attorney in Ohio, you can ensure that your operating agreement is up to date and compliant with state law, providing you and your business with clarity, protection, and a solid foundation for future growth.
DISCLAIMER: The information provided does not, and is not intended to constitute legal advice. All information and content is for general informational purposes only. Readers should contact an attorney to obtain advice with respect to any particular legal matter. The information presented may not reflect the most recent legal developments. The materials are not intended to create, and your receipt of them does not create, an attorney-client relationship. You should not act or refrain from acting on the basis of this article without first seeking legal advice from an attorney licensed in your state.