On May 4, 2012, Ohio enacted several new provisions relative to its limited liability company law (including R.C. 1705.18). One of the main reasons for creating a limited liability company (“LLC”) is to separate and distinguish the assets and liabilities of the business and the assets and liabilities of the individual owners (called “members”) of the company. One concern that arises is what a creditor of an individual member can do to force the company to satisfy the debts of that individual member. This can result in an otherwise profitable business being forced to absorb or pay for a member’s personal debt to avoid possible liquidation, dissolution, sale of company assets, or other legal remedies to satisfy that member’s individual debt.
However, Ohio’s law now expressly 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. This means that a creditor only has the right to a member’s share of distributions from the LLC if, and when, such distributions are made by the LLC. Previously, Ohio law was unclear and unsettled concerning a creditor’s rights and was thought to perhaps include, in addition to a charging order, seizure, execution, garnishment, or foreclosure on the member’s interest. Thus, with the enactment of the new law, a creditor may not foreclose on the member’s interest or seize LLC assets.
Due to the recent change in the law, Ohio now is considered a favorable asset protection state, similar to Nevada, Delaware, Alaska, Wyoming, and other popular domestic asset protection states. Accordingly, it is important for every business owner to ensure that he/she explore utilizing an LLC, whether through a new formation or conversion from a corporation or other entity. It is equally important to ensure that an existing LLC was created properly and is adhering to prudent formalities to maintain the limited liability protection and charging order limitation under Ohio law.
Please contact the attorneys at Kohler & Smith with any questions or concerns.