Changes to Pennsylvania Business Laws – Act 170 Update

On April 1, 2017, the most recent amendments to the Pennsylvania Associations Code, known as Act 170 (the “Act”), became applicable to all unincorporated associations without regard to the date of formation.  While the Act also applies to the multiple partnership structures, it is of particular importance to limited liability companies (“LLC”) because it creates new rules regarding the duties and contractual obligations of members and managers.

The duties prescribed by the Act coincide with the type of management elected upon formation. If member management is elected, then every member owes the LLC and the other members the duties of loyalty and care, as set forth in the Act.  If manager management is chosen, then the managers owe those same duties to the LLC and the members.  Importantly, the members of a manager managed LLC owe no duties to the LLC or the members based solely on their status as members. 

The duty of loyalty is a fiduciary duty that requires those bound not to: conduct LLC activity for personal gain; use LLC property for personal gain; appropriate LLC opportunities; engage in self-dealing; and compete with the LLC.  The duty of care requires those bound to refrain from engaging in gross negligence, recklessness, willful misconduct or a knowing violation of the law.

The Act permits the operating agreement of the LLC to vary certain aspects of these duties.  The duty of care may not be eliminated, but may be altered in ways that are not manifestly unreasonable.  Similarly, under the duty of loyalty the prohibitions against self-dealing and use of the LLC and its property for personal gain can be altered, but not eliminated.  On the other hand, the operating agreement for the LLC may completely eliminate the obligations of members not to compete and appropriate company opportunities.

The Act also provides that the contractual obligations of good faith (a sincere intention to deal fairly with others) and fair dealing (transacting business with candor and full disclosure) applies to all members in carrying out their obligations under the Act and the LLC operating agreement, regardless of whether the LLC is manager managed or member managed.  These contractual obligations are not fiduciary duties like the good faith concept inherent in corporate law because it does not prohibit actions that are in a member’s self-interest.  It only requires that members act within the scope of their agreed upon allocation of power and consistently with the intent and purpose of their contract.  By way of example, if an operating agreement permits a member to take action at the member’s discretion, the member does not breach this obligation simply because another member suffers a severe consequence.  The Act prohibits the operating agreement of an LLC from altering or eliminating the contractual obligation of good faith and fair dealing, though it may set the standard by which it is measured.

Business owners should contact an attorney familiar with the new law on how the Act’s new duties and obligations could affect your LLC.