New Pennsylvania Law on Business Entity Transactions Effective July 1, 2015

New provisions to Pennsylvania law relating to corporations and unincorporated associations will become effective July 1, 2015. The provisions became law on October 22, 2014 via Pennsylvania Act 172.

The primary goal of the new law is to restructure and simplify provisions governing all domestic entities formed by filings with the Pennsylvania Department of State, including provisions relating to filings, names, entity transactions and registration of foreign entities to do business in Pennsylvania.

The law will affect limited liability companies (LLCs), business corporations, nonprofit corporations, business trusts, limited partnerships, general partnerships, professional associations and unincorporated nonprofit associations. Business owners that are interested in changing the entity type of their business (perhaps from an LLC to a corporation), to merge with another business entity or to move their business from another state to Pennsylvania will benefit from the procedures set forth in the new law. Previously, these transactions were more costly and time consuming from a procedural and filing perspective.

While the following details may be of more interest to lawyers, getting familiar with the new statutory language and processes will help business owners to identify possible ways to accomplish their business goals.

New vocabulary applicable to all Title 15 entities

Numerous revisions in the new law will modify existing terms and define new terms used universally to apply to all business entities throughout Title 15. Here are some of the important changes and additions to defined terms found in 15 Pa.C.S. Section 102(a):

“Association.” A broad term that includes any type of private organization, which can be either domestic or foreign.

“Entity.” A domestic or foreign organization of a type whose organic law is found in Title 15, which is narrower in scope than “association.”

“Governor.” A person by or under whose authority the powers of an association are exercised and under whose direction the activities and affairs of the association are managed pursuant to the organic law and organic rules of the association. For example, this term includes a director of a corporation, a partner of a general partnership, a manager of a manager-managed LLC or a member of the board of governors of a professional association.

“Interest.” A share in a corporation for profit, a membership or share in a corporation not-for-profit, a governance interest or a distributional interest. For example, this term includes a share in a business corporation, a partnership interest in a limited partnership, or a membership interest in an LLC.

“Interest Holder.” A direct or record holder of an interest. For example, this term includes a shareholder of a for-profit business corporation, a partner in a general partnership or a member in an LLC.

“Organic Law.” The law of the jurisdiction of formation of an association governing its internal affairs. In Pennsylvania, this would include the Business Corporation Law of 1988, or if the association was formed under the laws of a foreign jurisdiction, that particular law. For the purposes of this law, “foreign” means the law of any other jurisdiction, including other states in the United States.

“Public Organic Record.” The document the public filing of which by the department or a similar agency in another jurisdiction is required to form an association. For example, the articles of incorporation for a corporation or the certificate of limited partnership for a limited partnership.

“Private Organic Rules.” The rules that govern the internal affairs of an association, such as the bylaws of a corporation or the operating agreement of an LLC.

 “Organic Rules.” The public organic record and private organic rules of the association.

Entity Transactions

This portion of the new law enacts a version of the Model Entity Transactions Act, which will cover mergers, conversion, interest exchanges, division and domestication of foreign entities. In order for an entity to properly become a party to any of these transactions, a plan must be adopted pursuant to Sections 321 through 330.

Here is a brief summary of each type of transaction:

Merger: the combination of one or more domestic entities with one or more domestic entities and foreign associations into a surviving association.

Conversion: a domestic entity may become a domestic entity of a different type, for example, a business corporation can become an LLC.

Interest Exchange: a domestic or foreign association may exchange interests so that one of them is controlled by the other without actually merging the two entities.

Division: a domestic entity may divide into one or more new associations that are either domestic entities or foreign associations.

Domestication: a foreign entity may become a domestic entity of the same type in Pennsylvania provided that Title 15 allows formation for that type of entity.

Conclusion

In theory, having uniform vocabulary and a uniform process for common business transactions will make these transactions more efficient procedurally, however it remains to be seen whether the new law will accomplish its goal. Further, the potential tax consequences at the state and federal levels will have to be explored by accountants and tax counsel. An analysis of whether any of these transactions is the best approach for accomplishing your business goals should be conducted by experienced attorneys and accountants.

Matt Landis is an attorney at Russell, Krafft & Gruber, LLP, in Lancaster, Pennsylvania. He received his law degree from Widener University and works regularly with business owners and entrepreneurs.