Filing Articles of Organization brings your Ohio LLC into existence. The operating agreement is what makes it work. It is the private contract among the owners (called members) that sets out who owns what, who makes decisions, how money comes out of the company and what happens when someone wants to leave. Many new business owners skip it or download a generic form. That is a mistake, because when there is no agreement, or it doesn’t cover an issue, Ohio law fills the gap, and its default rules may not be what you expect.
What an operating agreement is
Ohio’s LLC statute, Chapter 1706 of the Ohio Revised Code, defines an operating agreement broadly as any valid agreement of the members, written or oral, or any written declaration of a sole member, about the company’s affairs and activities. The operating agreement is not filed with the Ohio Secretary of State. It stays with the company’s records.
Ohio replaced its old LLC law with the Ohio Revised Limited Liability Company Act, which took effect February 11, 2022. The new Act applies to all Ohio LLCs, including ones formed before that date. Older companies were not required to rewrite their agreements, but an agreement drafted under the old law may not line up with the new default rules, so it is worth a review.
Why the default rules matter
The Act gives members wide freedom to set their own terms. Where the operating agreement is silent, though, statutory defaults apply. A few of them surprise people:
- Voting is per member, not per dollar. Unless the agreement says otherwise, ordinary business decisions are made by a majority of the members, with each member getting one vote regardless of how much capital he or she put in (R.C. 1706.30).
- Some decisions require everyone. By default, amending the operating agreement, acting outside the ordinary course of business and filing for bankruptcy require the consent of all members. That means one member can block a major decision.
- Distributions are shared equally. Absent an agreement, distributions before winding up are generally made in equal shares among the members (R.C. 1706.29), even if one member contributed far more money than the others.
Picture two members who start a company: one contributes $90,000 and the other contributes $10,000 plus sweat equity. Without an agreement that says otherwise, they may have equal votes and equal shares of distributions. A well-drafted operating agreement avoids that kind of mismatch.
Key terms to include
Ownership and capital contributions
Spell out what each member is contributing (cash, property, services), each member’s percentage or units, and whether members can be required to put in more money later. Address what happens if a member fails to make a required contribution. The Act lets an operating agreement set consequences for a member’s default, such as reducing or eliminating the defaulting member’s interest or forcing a sale of it.
Management and authority
The new Act no longer forces every LLC into a strict “member-managed” or “manager-managed” box. The agreement can create the structure that fits, from a single managing member to a corporate-style board. Be clear about who can sign contracts, open bank accounts, borrow money or buy and sell property, and which decisions need a vote of the members. Ohio also allows an LLC to file a statement of authority with the Secretary of State describing who may act for the company (R.C. 1706.19), which can help when dealing with banks and title companies.
Voting thresholds
Decide which decisions need a simple majority, which need a supermajority and which need unanimous consent. Most companies tie voting to ownership percentages rather than the per-member default, and they list major decisions, such as selling substantially all assets, admitting new members or taking on significant debt, that require a higher vote.
Profits, losses and distributions
Explain how profits and losses are allocated, when cash is distributed and whether the company will make tax distributions so members can pay taxes on income passed through to them. Tax allocations can get technical, so coordinate this section with your accountant.
Duties of members and managers
The Act sets default fiduciary duties of loyalty and care, and they differ depending on whether the company has managers. A written operating agreement may expand, restrict or, in some cases, eliminate those duties, but it cannot eliminate the implied covenant of good faith and fair dealing (R.C. 1706.08). Owners on the minority side of a deal often want stronger duties, while controlling owners may want more room to act. This is an area where each side should understand what it is agreeing to.
Transfers, buyouts and exits
Few things cause more disputes than an owner who wants out, gets divorced, becomes disabled or dies. The agreement should cover whether members can transfer their interests, rights of first refusal, buy-sell triggers, how a departing member’s interest is valued and how the buyout is paid. Without these terms, the remaining owners may end up in business with an heir or ex-spouse they never chose.
Dispute resolution and dissolution
Include a process for deadlocks and disagreements, such as mediation or arbitration, and describe how the company will wind up if the owners decide to end it.
Single-member LLCs need one too
Ohio law expressly provides that an operating agreement is not unenforceable just because only one person is a party to it (R.C. 1706.081). For a single-member LLC, a written agreement helps document that the company is a separate business, clarifies what happens if the owner dies or becomes incapacitated and is often requested by banks and lenders. It also pairs naturally with an estate plan.
Common mistakes
- Using a generic online form that doesn’t match how the business actually operates.
- Signing an agreement at formation and never updating it as owners, capital or plans change.
- Leaving out buyout and valuation terms until a dispute is already underway.
- Relying on an agreement drafted under Ohio’s old LLC law without checking it against the new Act.
- Ignoring the agreement in practice, which can create disputes and undercut the company’s separateness.
Getting started
Before you meet with an attorney, gather your Articles of Organization, a list of members and what each is contributing, and your answers to a few questions: Who makes day-to-day decisions? Which decisions need everyone’s approval? How and when will money be distributed? What happens if someone wants to leave, or can’t continue? If you already have an operating agreement, especially one signed before 2022, pull it out and read it with those questions in mind.
Vincent Esquire helps Ohio business owners draft and update operating agreements that fit how their companies actually run. Learn more about our business law services or reach out to talk through your plans.
This article is for general informational purposes only and is not legal advice. Reading it does not create an attorney-client relationship. Laws change and every situation is different, so consult an attorney about your specific circumstances. Attorney advertising.
