Significant Changes Effective April 1 for Pennsylvania’s LLC and Partnership Laws
Today’s National Crayon Day. While it should be a happy day, full of nostalgic memories of simpler times, I’m feeling bittersweet since Crayola has announced that it will retire dandelion from its standard 24 pack of crayons. With change comes new opportunity – a brand new color will be announced today to replace dandelion, albeit with some big shoes to fill. The name of the crayon will likely be determined by a contest.
As a business lawyer, I’ve grown fond of the familiar entity formation laws that I’ve grown up with. The Pennsylvania Limited Liability Company Law of 1994 has gone largely unchanged since my graduation from law school, and it was my dandelion. I knew that when I opened up my box of crayons (Westlaw), the LLCL was there in all of its glory, just as I remembered it. But as of tomorrow, the provisions of Act 170 will be the law of the land for all Pennsylvania LLCs and will be known as the Pennsylvania Uniform Limited Liability Company Act of 2016. Unfortunately, the naming contest is already over and our legislature missed an opportunity to consult the Internet, which has significant expertise in creative naming.
Act 170 makes some significant revisions to the unincorporated entity laws in Pennsylvania. Unincorporated entities include partnerships, limited partnerships, limited liability companies (LLCs) and now limited liability limited partnerships. While the law was effective on February 21, 2017 for newly created entities, as of April 1, 2017, the changes in Act 170 apply retroactively to all existing LLCs and limited partnerships.
Below is a brief summary of some of the most significant changes in Act 170:
- The Pennsylvania Department of State has new forms for filings, available at http://www.dos.pa.gov/BusinessCharities/Business/RegistrationForms/Pages/default.aspx
- Allows for creation of benefit companies, which is the LLC version of a benefit corporation, which allows a purpose that includes having a material positive impact on society and the environment.
- Allows for creation of an LLC or a limited partnership with a nonprofit purpose, so you are no longer limited to a nonprofit corporation in Pennsylvania.
- Added provisions regarding derivative suits and special litigation committees for business corporations, nonprofit corporations, limited partnerships and LLCs.
- 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. Members can file a certificate of authority with the Department of State to show via public record that a particular member has authority to sign legal documents.
- New Chapter 88 provides a set of default rules for LLCs that members can vary through an Operating Agreement, subject to the restrictions and limitations in Section 8815(c). These rules impact governance of the LLC through voting, and fiduciary duties to the LLC and the other members such as the duty of loyalty and duty of care.
- Provides that the economic rights to distributions of an LLC interest are transferable personal property, which may be obtained by creditors who are not members. The default rule is that management rights may not be transferred to a person who is not a member of the LLC.
- Provides new rules regarding dissociation from an LLC as a member and dissolution of the LLC.
- Allows for creation of Limited Liability Limited Partnerships (LLLPs).
Overall, the new law may not be my familiar dandelion, but the revisions address a need to clarify ambiguities in the prior law that should provide for more streamlined dispute resolution and will hopefully provide owners more certainty of their rights and obligations in their entities.
For existing LLCs and partnerships, now would be a great time to contact your attorney to review your Operating Agreement or Partnership Agreement to assess whether any revisions should be made based on the provisions of Act 170. If you’re considering starting a new business, make sure to consider the provisions of the new law when drafting your governing documents.