Pennsylvania has recently enacted a set of laws (known as Act 170) which modernizes the treatment of unincorporated associations (LLCs, Limited Partnerships, Limited Liability Partnerships, and Limited Liability Limited Partnerships) and makes Pennsylvania a much more desirable place for owners of these businesses to run their companies.
The new Act applies to all unincorporated associations formed on or after February 21, 2017, and to all existing entities as of April 1, 2017. The Act completely replaces the statutes governing partnerships, limited partnerships and limited liability companies. Essentially, through the enactment of this Act, Pennsylvania has adopted the most current versions of the Uniform Limited Liability Company Act, the Uniform Limited Partnership Act and the Uniform Partnership Act, putting Pennsylvania in a much stronger position to contend with ultra-business friendly states like Delaware.
There are a number of significant changes imposed by the Act, including the following:
- Duties of Managers and General Partners: The Act establishes that LLC managers, including managing members, and LP general partners owe a duty of loyalty, a duty of care and an obligation of good faith and fair dealing to the entity and the other members/partners. Although these duties can be altered or limited through the Act by way of an operating or partnership agreement, it cannot be eliminated entirely.
- Apparent Authority: Members of LLCs no longer have statutory apparent authority, which means that they are not an agent of the LLC solely by reason of being a member.
- Distribution Tests: The new law provides two tests for measuring the legality of LLC distributions, which include transfers of cash or property to members:
- “Insolvency Test” – a distribution is not allowed if the company is unable to pay its debts as they become due; and
- “Balance Sheet Test” – a distribution is unlawful if, after the distribution is made, the company’s total liabilities would exceed the company’s total assets.
Under the Act, companies must satisfy both tests in order for the distribution to be lawful, and these tests apply to both interim and liquidating distributions.
- Allows for the Creation of Limited Liability Limited Partnerships: A limited liability limited partnership (LLLP) is a type of partnership that is very similar to a limited liability partnership (LLP) in that it has two types of partners, general partners and limited partners. Unlike an LLP, however, the general partners in an LLLP have some liability protection. The general partners of an LLLP are not personally responsible for the debts incurred by the partnership unless they agree to be through debt covenants or other contracts. The main advantage of an LLLP is that all partners are protected by some form of liability protection, but not to the same extent of protection of an LLC or corporation.
- Transfer of Interests and Governance Rights: Absent a provision in the partnership or operating agreement to the contrary, the only interest in a partnership or limited liability company that may be transferred is the partner or member’s Transferable Interest. The Transferable Interest is the financial interest in the entity that entitles the holder to receive distributions, but does not include any voting or management rights. Essentially, a member can only transfer economic rights (the right to receive distributions) to persons outside the business, but managing rights are not transferable unless the operating agreement provides otherwise.
- Charging Orders: Under the Act, the sole method by which a judgment creditor can extract any value from a debtor’s interest in a partnership or limited liability company is by way of a charging order, which gives the creditor a lien on the debtor’s Transferable Interest in the entity. Notably, this only provides the creditor with the right to receive distributions and does not include any management rights.
- Full Shield Protection for Partners: The existing laws on partnerships were amended to replace the former ‘partial shield’ protection for partners and replace it with ‘full shield’ protection by removing language that implied that a partner in a limited liability partnership or limited liability limited partnership could be liable for any act of a person under the supervision and control of the partner even if the partner had no responsibility to supervise or control the act giving rise to the liability. As a result of the revised language, partners are now only liable for their own negligence or wrongful acts.
If you’re currently the owner or operator of a partnership or LLC in the Commonwealth of Pennsylvania, the time is ripe to review your operating/partnership agreement with your attorney. There may be changes required or recommended as a result of the passage of Act 170, and your attorney would be in the best position to point you in the right direction. If you have any questions about the information in this article or are interested in getting more specific information regarding the impact of these changes to the business laws in Pennsylvania, the attorneys at Howland Hess O’Connell are available to assist you today. Call for a free consultation at (215)-947-6240 or contact us online to schedule a meeting.
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