New Changes to Pennsylvania's Business Entity Laws
On July 1, 2015, changes to the laws governing Pennsylvania corporations and other business entities became effective. The changes have an impact on the current statutory frameworks of both Title 15 (relating to business entities) and Title 54 (relating to the naming of business entities). This article will focus on the changes to Title 15 and the impact that it may have on your business.
The Title 15 changes, known collectively as the Association Transaction Act (the “Act”), are designed to modernize the law of corporations and other associations and make Pennsylvania competitive with other states in attracting business organizations. The law is written in a uniform way so that it applies to all of the major types of business organizations – referred to collectively as “Associations”. In particular, it is designed to significantly improve the process of certain types of fundamental transactions and establish the rights of “Interest Holders” in the Associations when those transactions take place. “Interest Holder” is a general term defined as a direct holder of an interest in the Association, and includes: shareholders of a corporation; members of a limited liability company; partners of partnerships; members of non-profits; and beneficiaries of business trusts.
The Act permits any of the Associations to engage in fundamental transactions in a uniform structure with any other Associations. These fundamental transactions are:
- The merger of one entity with or into another.
- Conversion of one type of entity to another type of entity.
- Interest exchanges between two entities so that one of them is controlled by the other without actually merging the entities.
- Division of one existing entity into two or more resulting types of associations.
- Domestication into Pennsylvania of an entity originally organized in another state.
Under the old law, there were different rules for each type of entity engaging in a fundamental transaction. As a result transactions suffered from unnecessary complexity and cost. For instance, a limited liability company can now convert into a corporation in one single step instead of engaging in a more complex merger transaction. Additionally, under the old law only corporations could engage in a transaction exchanging equity (shares) as an alternative way to complete a merger transaction. Now all entity types can exchange their equity interests through an interest exchange.
While the Act has improved and streamlined transactions and thus reduced costs to businesses, the tax realties remain the same. Under the Internal Revenue Code, a tax-free reorganization (like a merger) can still only take place when all of the parties are treated as corporations for income tax purposes. When one or more of the parties are not treated as corporations then the tax consequences will typically follow the substance of the transaction – which means they can get complicated, and will still require significant advanced planning.
The Act provides practitioners with greater flexibility in structuring, reorganizing and disposing of businesses. Implementation of the Act should achieve the legislature’s goal of lowering transaction costs and promoting business growth in the Commonwealth.