Pennsylvania Overhauls Laws Governing Unincorporated Business Associations
Pennsylvania recently enacted Act No. 170 (the “Act”) changing the statutes governing partnerships and limited liability companies in the Commonwealth.
The Act repeals existing statutes and replaces them with entirely new statutes in Title 15 of the Pennsylvania statutes, now referred to as the Pennsylvania Uniform Partnership Act of 2016, the Pennsylvania Uniform Limited Partnership Act of 2016, and the Pennsylvania Uniform Limited Liability Company Act of 2016. The Act also makes changes affecting partner liability and partnership distributions on Limited Liability Partnerships and Limited Liability Limited Partnerships.
What are the changes and what impact could they have on your business?
The Act applies to any general partnership, limited partnership and limited liability companies formed on or after February 21, 2017. Beginning April 1, 2017, the Act applies to any unincorporated business association formed before February 21, 2017.
Here is an overview of some of the most significant changes.
Limited Liability Partnerships and Limited Liability Limited Partnerships
The Act makes important amendments to Chapter 82 of Title 15, governing limited liability partnerships and limited liability limited partnerships.
Previously, Pennsylvania law only provided a partial liability protection for partners, liability partnership or general partners of a limited liability limited partnership. Prior to the law, a partner could be held liable for negligent or wrongful acts or misconduct of a person under their supervision (even if the partner had no immediate supervision or control of the act). That loophole has now been closed. Under the amendments provided, partners, liability partnerships or general partners of limited liability limited partnerships are responsible for their own negligence or wrongful acts.
Pennsylvania previously imposed no restrictions on distributions from partnerships. Now, the Act imposes a solvency test on distributions from limited liability partnerships and limited liability limited partnerships. In short, a partnership may not make a distribution to its partners if the distribution would render the partnership unable to pay its debts or if the distribution would cause the partnership to have a negative net asset value. A partner consenting to or receiving an improper distribution may be personally liable to the partnership for all or some of the distribution.
A general partnership exists where two or more persons enter into a for profit business venture that is not categorized as another type of entity. Under the Act, Pennsylvania General Partnerships are now governed by a separate Chapter of Title 15, referred to as the Pennsylvania Uniform Partnership Act of 2016.
The Uniform Partnership Act clarifies whether or not a general partnership exists as an entity separate from its owners. The Uniform Partnership Act states clearly that a general partnership is an entity distinct from its owners.
Certificate of Partnership Authority
Although creation of a general partnership does not require any specific filing with the Commonwealth, a general partnership may file a “Certificate of Partnership Authority” for the partnership. The certificate may grant or limit one or more partners authority to do business on behalf of the entity.
Under prior law, a general partnership dissolved when a partner dissociated with the partnership. Dissolution required the partnership to wind up its affairs and distribute its property. Under the Uniform Partnership Act, the dissociation of a partner will not automatically cause a general partnership to dissolve. Instead, the partnership only dissolves on the dissociation of a partner if the partner expresses a will to dissolve the partnership.
Under the Act, Pennsylvania limited partnerships are now governed by a separate Chapter of Title 15. This Chapter, called the Pennsylvania Uniform Limited Partnership Act of 2016, makes a few changes to the way Pennsylvania governs limited partnerships.
Dissociation of Limited Partners
Under prior law, a partner could withdraw with notice. Under the Uniform Limited Partnership Act, a limited partner has no right to withdraw from the partnership prior to the partnership’s termination. The partnership may, however, provide a limited partner with withdrawal rights in the partnership agreement.
Dissolution of a Limited Partnership
Dissolution of a limited partnership used to require the consent of all of the partners. Under the Uniform Limited Partnership Act, a limited partnership may be dissolved with the vote of the general partners and only a majority of the limited partners.
Limited Liability Companies
Under the Act, Pennsylvania limited liability companies are governed by the Pennsylvania Uniform Limited Liability Company Act of 2016. This new Chapter of the Act makes significant changes to the way Pennsylvania governs limited liability companies. Some of the more important changes are summarized below.
Content of LLC Operating Agreements/Fiduciary Duties
The Uniform Limited Liability Company Act outlines 20 provisions that the operating agreement may not vary from.
Significantly, an operating agreement may not eliminate fiduciary duties of loyalty and care, but may alter these duties as long as alterations are not “manifestly unreasonable.” The duty of loyalty requires a member or manager to act for the benefit of the company, to refrain from self-dealing at the expense of the company, and not to compete with the company’s business. The duty of care requires that a member or manager refrain from engaging in recklessness, gross negligence, willful misconduct, or knowingly violating the law.
The Uniform Limited Liability Company Act does allow for an operating agreement to vary many other statutory provisions which would usually serve as the “default” provisions governing the business entity.
The Uniform Limited Liability Company Act changes to the way a creditor of a member can extract value from a member’s interest in the company. The sole method a creditor now has is a “charging order” on the debtor’s “transferable interest” in the business entity. A transferrable interest is a property right to the member’s right to distributions, but does not give its owner any governance rights. The charging order does not provide the creditor with any management rights.
If the charging order fails to satisfy the creditor’s full judgement, the creditor has the option to foreclose on the debtor’s transferrable interest in the company and force the sale of the transferrable interest. If a sale is forced, the purchaser of the foreclosed interest will not become a partner or member of the business, or have any governance rights, because the purchaser only obtained the member’s transferable interest. However, in the case of a foreclosure of a single member limited liability, the purchaser does obtain the debtor’s full membership interest. The purchaser then becomes a member of the business with full governance rights.
New Non-profit Entities
The Act creates a new hybrid profit/non-profit entity known as a “Benefit Limited Company” and allows non-profit organizations to be organized as partnerships or limited liability companies.
The Uniform Limited Liability Company Act creates a new type of entity – “benefit company.” A benefit company is a form of limited liability company operated for the dual purpose of generating a profit and having a general or specific public benefit as one of its purposes. Pennsylvania is the third state to allow this type of entity – in addition to Maryland and Oregon.
Unincorporated Non-profit organizations
Prior to the Act, a non-profit organization could form itself as a trust or corporation. Under the Act, a non-profit organization can form itself as a limited partnership or a limited liability company as well.
Contact McCarthy Weidler PC for more information.