Pennsylvania legislation known as Act 170 (the “Act”), which went into effect earlier this week, represents a comprehensive revision to the existing laws of partnerships and limited liability companies. The Act amends Pennsylvania law on corporations and unincorporated associations and adopts the Uniform Partnership Act, Uniform Limited Partnership Act and Uniform Limited Liability Company Act and is effective in two stages:
- On February 21, 2017 for all entities that file on or after February 21, 2017; and
- On April 1, 2017 for all existing entities unless such entities elect to be governed by the Act.
Below is an overview of some of the most significant changes to Pennsylvania laws governing business entities included in the Act.
New Nonprofit and Benefit Entities
The Act authorizes nonprofit limited partnerships and limited liability companies and also creates benefit limited liability companies, companies that are intended to be operated and governed for the dual purpose of generating profit while also having a material positive impact on society or the environment. Pennsylvania is only the third state to authorize benefit limited liability companies, joining Maryland and Oregon.
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. A transfer of the Transferable Interest does not cause disassociation of the transferor and does not entitle the transferee to participate in the conduct of the company’s activities and affairs, to have access to records or other information, or compel or dictate the timing of distributions.
Similar to the rights of a transferee, 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. As discussed above, this only provides the creditor with the right to receive distributions and does not include any management rights. Additionally, the creditor’s right to distributions excludes “amounts constituting reasonable compensation for present or past service or payments made in the ordinary course of business under a bona fide retirement plan or other benefits program.” If the charging order does not satisfy the creditor’s judgment in full, the creditor may foreclose on the debtor’s interest, but a purchaser at a foreclosure sale will not become a partner or member and will only obtain the Transferable Interest. The exception to the foregoing is in a single member limited liability company, in which case the purchaser obtains the debtor’s entire interest, the debtor is disassociated as a member, and the purchaser becomes a member with full governance rights.
Full Shield Protection for Partners
The existing law on partnerships was 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.
Elimination or Alteration of Fiduciary Duties
The Act also includes significant changes with respect to the ability of partners or members to eliminate or alter certain fiduciary duties through careful drafting of the operating or partnership agreement. This topic will be discussed in more detail in a follow-up post.