If an LLC is Set-up With a Corporate Structure, What Laws Apply?

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Many LLCs are set up with a corporate governance structure.  These LLCs are formed by filing Articles of Organization with the Secretary of State's Office.  These LLCs generally have an operating agreement.  But these LLCs also generally have By-Laws and a Board of Directors and Officers.  So when a question arises concerning governance of the LLC, do you look to ORC chapter 1705 which governs LLCs or do you look to ORC chapter 1701 which governs corporations?  The answer is it depends on whether you added language to the Operating Agreement to say that ORC chapter 1701 applies in certain situations.

An LLC is generally governed under ORC chapter 1705.  This means that if the LLC's operating agreement is silent on a particular issue, then the default provisions of ORC chapter 1705 apply.  But if the LLC's Operating Agreement provides for a different method or procedure for governing the LLC, the method or procedure set forth in the Operating Agreement controls.  As a result, it is possible to have parts of ORC chapter 1701 apply to the LLC by so providing in the LLC operating agreement.

Why would you want ORC chapter 1701 apply?  Well there are some concepts in ORC chapter 1701 that do not exist in ORC chapter 1705.  For example, under ORC section 1701.55, shareholders may cumulate their voting power when voting for directors.  In this way a minority shareholder is able to vote in a director acceptable to the minority shareholder.  Without cumulative voting the majority shareholder is always be able to vote in all the directors.

There is no similar cumulative voting procedure under ORC chapter 1705.   So under ORC chapter 1705,  the majority members can appoint all of the members of the Board of Directors.  To avoid this result, the members could provide in the operating agreement that the cumulative voting procedures of ORC section 1701.55 shall apply to th election of members of the Board of Directors of the LLC.

There are numerous differences in the laws that govern LLCs and corporations.  You need to be sure you understand what laws apply to you.  Contact me at 937-223-1130 or Jsenney@pselaw.com.

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