Ohio Decision Reminds Us of the Necessity of Careful Compliance with the Statute for Those Seeking to Become Members

Ohio Decision Reminds Us of the Necessity of Careful Compliance with the Statute for Those Seeking to Become Members

In a recent decision from Ohio, the court considered and rejected the argument that the plaintiff became a member in an existing LLC. In this instance, the statute required (and the operating agreement did not change the rule) that the admission of a new member be in a writing writing signed by all of the incumbent members and that detailed the members’ share of the LLC’s profit and losses they are to receive. Both were in this instance lacking. Boyles v. Kanz, 2020-Ohio-1222, 2020 WL 1526445 (Ohio Ct. App. Fifth Dist. March 23, 2020).

Kanz and Thompson owned and operated a limited liability company, Valley Masonry. It was alleged that they solicited the plaintiff, Boyles, to join that LLC. In furtherance thereof, they changed the name of the LLC from “Atlas TK Masonry, LLC” to “Atlas TKB Masonry, LLC.” When the relationship ultimately soured and Kanz and Thompson moved to squeeze Boyles out of the company, he alleged that in fact he was a one-third member therein. However, no new operating agreement had ever been signed reflecting Boyles as a member. Boyles alleged that are being forced out was a breach of fiduciary duties owed him by the other members. The trial court found that Boyles was never a one-third member in the LLC, leading to this appeal.

Applying the Ohio LLC Act and specifically section 1705.14 thereof, the court noted that the admission of a new member to an LLC requires the consent of all the members. It was noted as well that a “member” is defined in the Ohio LLC Act as “a person whose name appears on the records of the limited liability company as the owner of a membership interest in that company” and that “membership interest” is defined as “a member’s share of the profits and losses of the limited liability company and the right to receive distributions from that company. Ohio Code § 1705.01(G), (H).

Reviewing the voluminous records tendered, the trial court was unable to find, and the Court of Appeals was not going to reverse its determination as to those matters, either a written consent of Thompson and Kanz for the admission of Boyles as a member or any writing assigning to Boyles a membership interest detailing his allocation of company profits and losses.

Failing to carry his burden of proof that the statutory requirements for admission as a member were satisfied, Boyles’ complaint was dismissed.

No less so than in acquiring a membership interest from an already existing member, a person buying into an existing LLC needs to apply the rule of caveat emptor. This is not a transaction to be undertaken without legal counsel unless you are willing to entirely walk away from the anticipated investment. The first document that needs to be requested is a copy of the existing operating agreement. Money should not change hands until there is a written of admission agreement, either as a freestanding document or within the operating agreement, and amended operating agreement reflecting the new member’s admission as a member and their sharing ratios with respect to the various tax items and distributions, in the written consents of the other members at whatever threshold is defined by the statute or the operating agreement for admission. Failure to engage in these steps may result in a situation not unlike that of Boyles, believing you are a member when in fact you are not.