Significant Amendments to the Pennsylvania Law on Partnerships and Limited Liability Companies Take Effect in February
Having already passed the Pennsylvania Senate on October 26, 2016 and the Pennsylvania House of Representatives on October 27, 2016, House Bill No. 1398 was approved by the Governor of Pennsylvania on November 21, 2016 and became Act No. 170 (the “Act”). The Act amends Title 15, Corporations and Unincorporated Associations, and completely replaces the existing laws on partnerships, limited partnerships and limited liability companies by adding three new sections known as the Uniform Partnership Act (“UPA”), the Uniform Limited Partnership Act (“ULPA”) and the Uniform Limited Liability Act (“ULLA”).
Encompassing general partnerships and limited liability partnerships, the UPA makes several key changes to the governance of partnerships in Pennsylvania. The definition of “general partnership”, for example, has been amended to clarify that a general partnership is an entity, making it easier to transfer property. The automatic dissolution rules currently in place when a partner dissociates from a general partnership have been eliminated, and the Act now spells out certain duties of loyalty and care that a partner owes to a partnership. The UPA also expands the circumstances where one or more partners may sue another partner for breach of fiduciary responsibility. The UPA now provides that a limited liability partnership shall offer a full, rather than a partial, liability shield to its partners, and now grants general partners of a limited liability partnership the same protection as a shareholder of a corporation or a member of a limited liability company. Because of the expanded liability shield, distribution tests were added to the Act to help creditors recover improper distributions
Limited partnerships, previously contained in the general partnership statutes, now fall under the jurisdiction of the ULPA. Limited partners will no longer be able to disassociate before the termination of a limited partnership, as they were able to do under the previous statutes. Instead, the power to dissociate will only be recognized and permitted through a partnership agreement or specific exceptions listed in the Act. The written consent requirements for the dissolution of a limited partnership have also been updated. While the consent of all the partners was previously needed, now the consent of only (i) the general partners, and (ii) the limited partners owning the rights to receive a majority of the distributions as limited partners are required to dissolve.
In addition to governance changes to Pennsylvania partnerships, the Act changes the regulations of limited liability companies through the ULLA. The ULLA gives more governance power to the operating agreement, as the certificate of organization no longer requires the organizer to declare the limited liability company as either member managed or manager managed and no longer requires the organizer to declare if membership interest will be evidenced by certificates, among other changes. It is further clarified in the ULLA that the operating agreement governs all the rights and obligations of the members except as specifically provided in the ULLA. An operating agreement, for instance, cannot eliminate the duties of loyalty and care. Similarly, a member may seek a court order to dissolve a limited liability company, of which they are a member, if the manager(s) or controlling member(s) have acted in a manner that is directly harmful to the petitioning member.
The ULLA removes the apparent authority of a member, an idea currently accepted by Pennsylvania law, by providing that “a member is not an agent of a limited liability company solely by reason of being a member” (§8831).
Creditors who have a judgment against a partner of a partnership or against a member of a limited liability company will now be restricted to obtaining a “charging order” against the debtor’s partnership or membership interest. A charging order gives the creditor a lien on the debtor’s “transferable interest’ in the entity, which is the right to receive any distribution from the entity that would otherwise have been paid to the debtor, but does not include any right to participate as a partner or member in the management or conduct of the entity’s activities and affairs. In addition, if the charging order will not satisfy the creditor’s judgment in full, the creditor may foreclose on the debtor’s partnership or membership interest. If a person purchases a partnership or membership interest as part of a foreclosure sale, that purchaser will not become a partner of the Partnership or member of the limited liability company, but rather will only obtain the transferable interest.
The allowed purposes for limited partnerships and limited liability companies have also been altered to include purposes that are not-for-profit. The exact non-profit purpose will need to be defined in the entity’s public filing, however these purposes are now permissible under Pennsylvania Law which previously only allowed for non-profit corporations. Nonprofit limited partnerships and nonprofit limited liability companies will be permitted to receive and hold real property in trust for the purpose or purposes set forth in its public filing. In addition, the Act creates “Benefit Companies”, entities whose purpose must, at minimum, be for the general public benefit and may be for a specific public benefit. General public benefit is defined as “a material positive impact on society and the environment, taken as a whole and assessed against a third-party standard, from the business and operations of a benefit company” (§8892). Benefit Companies will be more transparent than other entities, as a third-party standard must be held and maintained by the entity and such reports and assessments confirming the third-party standard will be made publically available.
The Act is due to take effect on February 19, 2017, ninety (90) days after its approval date.
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