Pennsylvania’s Act 170 became effective Feb. 21, providing sweeping changes to laws regarding business entities
While the act amends certain statutes regarding corporations, the broadest changes are to unincorporated business entities, which include general partnerships, limited partnerships, limited liability partnerships and limited liability companies.
The act provides new rules for these unincorporated business entities with regard to formation, registration, liability, governance, distribution and dissolution. Pennsylvania also has adopted new forms that are required for the formation and dissolution of such business entities.
While the act went into effect immediately for business entities formed on or after Feb. 21 this year, all existing business entities became subject to the act on April 1.
It is important to note that for LLCs, LLPs and other unincorporated associations, Pennsylvania previously allowed governance to be dictated solely by agreements such as partnership agreements and operating agreements.
While Pennsylvania still allows for the entities to govern their activities by such agreements, there are now statutorily mandated default rules that will dictate governance of business entities if there is not express language to the contrary in the partnership or operating agreement.
DEFAULT ON VOTING POWER
One potentially concerning default rule that all members of LLCs should be aware is that, unless specifically stated otherwise in the operating agreement, each member will have equal voting power regardless of membership interest.
If this is not how you wish to have votes allocated and do not have language specifically detailing the allocation of votes, it will be necessary to update and amend your operating agreement.
Another significant change relates to how partners and members may transfer their ownership interest in partnerships and LLCs.
Absent specific written agreement among the members or partners to the contrary, the only interest that a partner or member may transfer is his or her transferable interest, which is defined as the individual’s financial interest enabling that individual to receive distributions. Partners or members cannot freely transfer voting or management rights to these entities.
NEW PROTECTIONS FOR AN LLP
Act 170 also offers greater flexibility to individuals seeking to form a new nonprofit or benefit company. The act now authorizes the formation of limited partnerships and LLCs as nonprofit entities; and LLCs may also be formed as benefit companies.
These designations were previously reserved for corporations.
Additionally, Act 170 provides new protections which may make LLPs a more desired choice of entity. For example, until the passage of Act 170, LLPs were not granted the same liability protections as LLCs and corporations.
Now, pursuant to Act 170, LLPs maintain a full liability shield, therefore providing additional options for those seeking to form a business entity.
KNOWLEDGE IS KING
This, of course, is not a complete review of all applicable changes. Act 170 is a sweeping reform of Pennsylvania business entity law and contains many nuanced changes.
All business entities should ensure they are familiar with all implications of Act 170 to avoid any unfavorable consequences and to determine if any changes should be made to governance agreements.
Attorney Thomas E. Reilly Jr. is a senior partner and chair of the business services group at Gross McGinley, Allentown. His background in accounting, business management and communications affords him the opportunity to work with business clients throughout the United States, from small entrepreneurial companies to large, multinational corporations. He can be reached at firstname.lastname@example.org or 610-820-5450.
Attorney Daniel A. Prestosh is a member of Gross McGinley’s business services group. He counsels small to medium-sized businesses as well as startups and entrepreneurs in general business matters, including corporate formation, contracts and agreements of sale. He can be reached at email@example.com or 610-820-5450.