On May 4th of this year Ohio’s new limited liability company law took effect (ORC 1705.18 and 1705.19). One of the chief reasons for forming a limited liability company (“LLC”) is to provide for separation between the assets and liabilities of the business and the assets and liabilities of the individual owners of the company. What should concern an LLC entity is what a creditor of an individual member can do to force the company to satisfy the debts of a member. Often this results in an otherwise viable business being forced to take on a member’s individual debt or face possible liquidation and other legal action to satisfy that member’s personal debt.
Ohio’s law now specifically provides that a “charging order” is the sole and exclusive remedy of a creditor of a member against that member’s interest in an LLC. What this means is that a creditor only has the right to a member’s share of distributions from the LLC when and if they are declared and made by the LLC. Prior to the change a creditor had other avenues available to it such as seizure, execution, garnishment or foreclosure on the member’s interest. The new law also provides that the creditor is considered an assignee of the member’s interest and takes subject to the operating agreement even though the creditor is not a signatory to the operating agreement. This prevents the creditor from asserting other extra-contractual rights on the grounds that they never personally signed the operating agreement.
These new changes apply to single member LLC as well as a multiple member LLC. Ohio now compares favorably to states such as Delaware, Texas and South Dakota, who also limit a creditor’s rights when it concerns a member’s interest in an LLC. These states have previously been preferred because of favorable statutes, case law and recognition of their asset protection trusts. Ohio has taken a big step towards becoming the state to consider when clients are trying to decide in which state they should form their LLC. This is especially true if the business is to operate in Ohio.