Why LLCs are Now the Entity of Choice in Pennsylvania · 31/12/2014 · Why LLCs are Now the Entity of Choice in Pennsylvania Webinar Noon-1 p.m. June 1, 2016 Wendi Kotzen, Partner

Why LLCs are Now the Entity of Choice in Pennsylvania

Webinar Noon-1 p.m. June 1, 2016

Wendi Kotzen, Partner

Ballard Spahr, Philadelphia

William H. Clark Jr., Partner

Drinker, Biddle and Reath,

Philadelphia

Saba Ashraf, Partner

Ballard Spahr, Philadelphia

A Brief Review of Entity Law Basics Relating to

Choice of Entity

William H. Clark, Jr. Drinker Biddle & Reath LLP

One Logan Square Philadelphia, PA 19103

(215) 988-2804 [email protected]

mailto:[email protected]

general approach on choice of entity

always:

• reduce taxes

• limit the liability of the owners

and usually:

• protect the people in charge

while:

• implementing the governance arrangement desired by the owners

liability of owners corporation good

– shareholders protected

general partnership bad – partners jointly and severally liable

LLP – PA partial shield – DE full shield

limited partnership mixed – general partners liable

LLLP – full or partial shield for general partners

limited liability company good – members protected

business trust good – beneficial owners protected

protection of those in charge • exoneration

– authorized by statute for corporations (and indirectly for some limited liability companies)

– available by contract for other types of entities

• indemnification – authorized by statute for corporations, limited

partnerships, and limited liability companies – available by contract for other types of entities

• advancement of expenses – authorized by statute for corporations, limited

partnerships, and limited liability companies – available by contract for other types of entities

• variation of duties – available in Delaware, but currently not in Pennsylvania

governance arrangements

• there are three basic governance paradigms: 1. corporation

board with overall responsibility and officers

2. general partnership all owners actively participate in management

3. limited partnership one or more managers locked into position

• the three paradigms largely may be replicated in any type of entity organized under Pennsylvania law – this is true even for corporations because of the

validation of freedom of contract in 15 Pa.C.S. § 1306(a)(8)(ii) and (b)

ENTITY COMPARISON CHART

By

William H. Clark, Jr. Drinker, Biddle &

Reath

Wendi L. Kotzen Saba Ashraf

Ballard Spahr LLP

May 2016

TAX C CORP S CORP LIMITED

PARTNERSHIP LIMITED LIABILITY

PARTNERSHIP GENERAL


COMPANY BUSINESS TRUST

ORGANIZE TAX FREE GENERALLY YES GENERALLY YES GENERALLY YES GENERALLY YES GENERALLY YES GENERALLY YES GENERALLY YES

TAX FREE CONTRIBUTION OF PROPERTY AFTER FORMATION

GENERALLY NO GENERALLY NO YES YES YES YES YES

TAX ON DEBT IN EXCESS OF BASIS OF CONTRIBUTED PROP

YES YES POSSIBLY POSSIBLY POSSIBLY POSSIBLY POSSIBLY

CAN HAVE CORPORATE OWNER

YES NO (EXEMPT ORG CORPORATE OWNERS WILL NOT CAUSE LOSS OF S STATUS)

YES YES YES YES YES

NEED TWO OWNERS NO NO YES YES YES NO, BUT IF ONE OWNER, WILL BE DISREGARDED FOR FIT AND PA INCOME TAX PURPOSES

NO, BUT IF ONE OWNER, WILL BE DISREGARDED FOR FIT AND PA INCOME TAX PURPOSES

MAXIMUM NUMBER OF OWNERS

NO 100 NO NO NO NO NO

This chart assumes that each entity that is not a state law corporation does not elect to be treated as a corporation and is not publicly traded.

7

TAX C CORP S CORP LIMITED PARTNERSHIP LIMITED LIABILITY

PARTNERSHIP GENERAL



PASS THROUGH FED

NO YES YES YES YES YES YES

PASS THROUGH PA INC TAX

NO YES, EXCEPT INCOME SUBJECT TO FIT (e.g., BUILT-IN GAINS) - SUBJECT TO CNIT

REQUIRED TO WITHHOLD PIT FROM NON-RESIDENT INDIVIDUAL SHAREHOLDERS

FOR TAX YEARS BEGINNING AFTER 12/31/2014, S CORPS WITH 11 OR MORE SHAREHOLDERS THAT UNDERREPORT INCOME BY $1 MILLION OR MORE ARE LIABLE FOR TAX WITHOUT REGARD TO THE SHAREHOLDERS’ ACTUAL TAX LIABILITY

YES

PARTNERSHIP REQUIRED TO WITHHOLD PIT FROM NON-RESIDENT INDIVIDUAL PARTNERS AND CNIT FROM CORPORATE PARTNERS THAT DO NOT FILE IN PA; CAN BE LIABLE FOR PARTNERS’ TAX UPON FAILURE TO WITHHOLD

FOR TAX YEARS BEGINNING AFTER 12/31/2014, PARTNERSHIPS WITH ENTITY PARTNERS OR WITH 11 OR MORE PARTNERS THAT UNDERREPORT INCOME BY $1 MILLION OR MORE ARE LIABLE FOR TAX WITHOUT REGARD TO THE PARTNERS’ ACTUAL TAX LIABILITY

YES



YES



YES

REQUIRED TO WITHHOLD PIT FROM NON-RESIDENT INDIVIDUAL OWNERS AND CNIT FROM CORPORATE MEMBERS THAT DO NOT FILE IN PA; CAN BE LIABLE FOR MEMBERS’ TAX UPON FAILURE TO WITHHOLD

FOR TAX YEARS BEGINNING AFTER 12/31/2014, LLCS WITH ENTITY MEMBERS OR WITH 11 OR MORE MEMBERS THAT UNDERREPORT INCOME BY $1 MILLION OR MORE ARE LIABLE FOR TAX WITHOUT REGARD TO THE MEMBERS’ ACTUAL TAX LIABILITY

YES

REQUIRED TO WITHHOLD PIT FROM NON-RESIDENT INDIVIDUAL OWNERS AND CNIT FROM CORPORATE MEMBERS THAT DO NOT FILE IN PA; CAN BE LIABLE FOR MEMBERS’ TAX UPON FAILURE TO WITHHOLD

FOR TAX YEARS BEGINNING AFTER 12/31/2014, LLCS WITH ENTITY MEMBERS OR WITH 11 OR MORE MEMBERS THAT UNDERREPORT INCOME BY $1 MILLION OR MORE ARE LIABLE FOR TAX WITHOUT REGARD TO THE MEMBERS’ ACTUAL TAX LIABILITY

8

TAX C CORP S CORP LIMITED PARTNERSHIP LIMITED LIABILITY

PARTNERSHIP GENERAL



ELECTION REQUIRED FOR FEDERAL, PA

NO YES

PA FOLLOWS FEDERAL (UNLESS ELECTION TO OPT OUT)

NO NO NO NO NO

PA CAPITAL STOCK TAX PHASED OUT EFFECTIVE 1/1/16

N/A N/A N/A N/A N/A N/A N/A

OWNER GETS BASIS FOR ENTITY’S DEBT

NO NO YES YES YES YES YES

CALENDAR OR BUSINESS YEAR REQUIRED

NO YES YES YES YES, WITH CERTAIN EXCEPTIONS

YES YES

CAN HAVE SUBSIDIARIES

YES YES YES YES YES YES YES

CAN BE DISREGARDED FOR FIT PURPOSES

NO NO YES IF DIRECTLY OR INDIRECTLY WHOLLY OWNED

YES IF DIRECTLY OR INDIRECTLY WHOLLY OWNED




CITY OF PHILADELPHIA TAXES

(GENERALLY NO PASS-THROUGH ENTITIES)

BUSINESS INCOME AND RECEIPTS TAX (FORMERLY BUSINESS PRIVILEGE TAX)

BUSINESS INCOME AND RECEIPTS TAX

QSSS NOT TREATED AS SEPARATE ENTITY BUT S CORP. PARENT AND QSSS TREATED AS ONE ENTITY AND SUBJECT TO BPT.


NET PROFITS TAX


NET PROFITS TAX


NET PROFITS TAX

FOLLOWS FIT

BUSINESS INCOME AND RECEIPTS TAX (IF DRE, THEN OWNER SUBJECT TO BIRT AND - IF APPLICABLE - NPT)


NET PROFITS TAX

9



PARTNERSHIP GENERAL



SUBJECT TO AT

RISK RULES

NO, UNLESS

CLOSELY HELD

YES YES YES YES YES YES

SUBJECT TO

PASSIVE

ACTIVITY LOSS

RULES

NO, UNLESS

CLOSELY HELD

YES YES YES YES YES YES

ACCRUAL

METHOD

REQUIRED

YES, UNLESS

QPSC OR GR

NO, UNLESS IT

HAS INVENTORY

YES IF C CORP

PARTNER OR TAX

SHELTER,

UNLESS GR AND

UNLESS IT

CHECKS THE BOX,

OR IT HAS

INVENTORY

YES IF C CORP

PARTNER OR

TAX SHELTER,

UNLESS GR AND

UNLESS IT

CHECKS THE

BOX, OR IT HAS

INVENTORY

YES IF C CORP

PARTNER OR

TAX SHELTER,

UNLESS GR AND

UNLESS IT

CHECKS THE

BOX, OR IT HAS

INVENTORY

YES IF C CORP

MEMBER OR

TAX SHELTER

UNLESS GR AND

UNLESS IT

CHECKS THE

BOX, OR IT HAS

INVENTORY

YES IF C CORP

MEMBER OR TAX

SHELTER UNLESS

GR AND UNLESS IT

CHECKS THE BOX,

OR IT HAS

INVENTORY

EMPLOYMENT

TAX/ SELF-

EMPLOYMENT

TAX

NOT ON

DIVIDENDS

ISSUES EXIST

FOR OE

GUARANTEED

PAYMENTS FOR

SERVICE YOU

RENDERED THE

PARTNERSHIP

ARE NET

EARNINGS FOR

SELF-

EMPLOYMENT

TAX.

GUARANTEED

PAYMENTS FOR

SERVICE YOU

RENDERED THE

PARTNERSHIP

ARE NET

EARNINGS FOR

SELF-

EMPLOYMENT

TAX.

GENERAL

PARTNER'S

EARNINGS

FROM SELF-

EMPLOYMENT

INCLUDE

DISTRIBUTIVE

SHARE OF

INCOME OR

LOSS AND

GUARANTEED

PAYMENTS FOR

SERVICES

RENDERED.

LIMITED

PARTNERS

ONLY

INLUCLUDE

GUARANTEED

PAYMENTS.

GUARANTEED

PAYMENTS FOR

SERVICE YOU

RENDERED THE

PARTNERSHIP

ARE NET

EARNINGS FOR

SELF-

EMPLOYMENT

TAX.

YES ON

ALLOCABLE SHARE

OF INCOME IF

MEMBER HAS

PERSONAL

LIABILITY FOR

DEBT OR CLAIMS

VS. ENTITY,

AUTHORITY TO

CONTRACT ON

BEHALF OF THE

BUSINESS TRUST

OR PARTICIPATES

IN THE BUSINESS

TRUST’S TRADE OR

BUSINESS FOR

MORE THAN 500

HOURS DURING

THE BUSINESS

TRUST’S TAX YEAR;

IF MEMBER IS

SERVICE MEMBER

10

11



PARTNERSHIP GENERAL



3.8% NET

INVESTMENT

INCOME TAX

MAY BE

IMPOSED ON

GAIN FROM

SALES OF

STOCK AND

DIVIDENDS

EARNED BY

INDIVIDUAL

SHAREHOLDERS

MAY BE

IMPOSED ON

GAIN FROM

SALES OF

STOCK AND

OTHER INCOME

EARNED BY

INDIVIDUAL

SHAREHOLDERS

IF OWNERSHIP

IS A PASSIVE

ACTIVITY

MAY BE IMPOSED

ON GAIN FROM

SALES OF

PARTNERSHIP

INTERESTS AND

OTHER INCOME

EARNED BY

INDIVIDUAL

PARTNERS IF

OWNERSHIP IS A

PASSIVE ACTIVITY

MAY BE

IMPOSED ON

GAIN FROM

SALES OF

PARTNERSHIP

INTERESTS AND

OTHER INCOME

EARNED BY

INDIVIDUAL

PARTNERS IF

OWNERSHIP IS A

PASSIVE

ACTIVITY

MAY BE

IMPOSED ON

GAIN FROM

SALES OF

PARTNERSHIP

INTERESTS AND

OTHER INCOME

EARNED BY

INDIVIDUAL

PARTNERS IF

OWNERSHIP IS A

PASSIVE

ACTIVITY

MAY BE

IMPOSED ON

GAIN FROM

SALES OF

MEMBERSHIP

INTERESTS AND

OTHER INCOME

EARNED BY

INDIVIDUAL

MEMBERS IF

OWNERSHIP IS A

PASSIVE

ACTIVITY

MAY BE IMPOSED

ON GAIN FROM

SALES OF

INTERESTS AND

OTHER INCOME

EARNED BY

INDIVIDUAL IF

OWNERSHIP IS A

PASSIVE ACTIVITY

DOUBLE TAX ON

SALE OF

ASSETS

YES NO, UNLESS TAX

ON BUILT IN

GAIN

NO NO NO NO NO

CAN RECEIVE

STOCK TAX

FREE IN A

MERGER

YES YES NO NO NO NO NO

ENTITY ASSET

BASIS STEP UP

ON TRANSFER

BY OWNER BY

SALE OR DEATH

NO NO YES WITH 754

ELECTION

YES WITH 754

ELECTION

YES WITH 754

ELECTION

YES WITH 754

ELECTION

YES WITH 754

ELECTION

QPSC = QUALIFIED PERSONAL SERVICE CORP. GR = GROSS RECEIPTS UNDER $10,000,000 OE = OWNER EMPLOYEE QSSS = QUALIFIED SUBCHAPTER S SUBSIDIARY

BUSINESS C CORP S CORP LIMITED


PARTNERSHIP GENERAL



LIMITED LIABILITY FOR OWNERS

YES YES YES FOR LIMITED PARTNERS

DEPENDS ON STATE STATUTE. DELAWARE OFFERS FULL SHIELD. PENNSYLVANIA—PARTNERS ARE NOT LIABLE FOR MISCONDUCT OF OTHER PARTNERS BUT ARE LIABLE FOR OBLIGATIONS OF THE COMPANY.

NO YES YES

LIMITED LIABILITY OF DIRECTORS/ MANAGERS/ OFFICERS

YES YES NO, FOR GENERAL PARTNER

SOME FOR GENERAL PARTNER

NO DEPENDS ON STATUTE

DEPENDS ON STATUTE

IMPACT OF DEATH OF AN OWNER ON THE BUSINESS

(PARTNERSHIP / LLC AGREEMENTS MAY PROVIDE OTHERWISE)

NONE NONE STATUTORY DISSOLUTION IF GENERAL PARTNER DIES OTHERWISE, NONE

STATUTORY DISSOLUTION IF GENERAL PARTNER DIES OTHERWISE, NONE

STATUTORY DISSOLUTION

DEPENDS ON STATUTE, MOST ARE THE SAME AS FOR A LIMITED PARTNERSHIP

NONE

TRANSFERABILITY OF INTERESTS IN ENTITY

YES YES, BUT RESTRICTIONS DESIRABLE

YES, BUT OFTEN RESTRICTED





ARE ANNUAL ELECTIONS OF DIRECTORS, MANAGERS, AND OFFICERS REQUIRED

YES YES NO NO NO NO NO

12

LP TO LLC AND LLC TO LP

LP TO LLC

GENERALLY A CONVERSION FROM AN LP TO AN LLC WILL NOT BE TAXABLE TO THE LIMITED PARTNERS. LIMITED PARTNERS WILL HAVE A TAX BASIS FOR THEIR MEMBERSHIP INTERESTS EQUAL TO THEIR BASIS FOR THEIR PARTNERSHIP INTERESTS, PLUS THEIR SHARE OF THE LLC’S RECOURSE DEBT. THE GENERAL PARTNER’S BASIS FOR ITS MEMBERSHIP INTEREST WILL DECREASE BY THE OTHER MEMBER’S SHARE OF THE LLC’S RECOURSE DEBT. THE GENERAL PARTNER COULD RECOGNIZE GAIN IF THERE IS A DECREASE IN ITS SHARE OF LIABILITIES AND THE DECREASE EXCEEDS THE PARTNER'S BASIS FOR ITS PARTNERSHIP INTEREST. THE LLC'S BASIS FOR ITS ASSETS WILL BE THE SAME AS THE BASIS THE LP HAD FOR THE ASSETS PLUS ANY GAIN RECOGNIZED BY THE PARTNERS. THE PENNSYLVANIA TAX CONSEQUENCES SHOULD BE THE SAME AS THE FEDERAL TAX CONSEQUENCES.

LLC TO LP – WILL BE VERY RARE

GENERALLY CONVERSION FROM AN LLC TO AN LP WILL NOT BE TAXABLE TO THE LLC MEMBERS. THE LIMITED PARTNERS WILL HAVE A BASIS FOR THEIR LIMITED PARTNERSHIP INTERESTS EQUAL TO THEIR BASIS FOR THEIR MEMBERSHIP INTERESTS LESS THEIR SHARE OF THE LP’S RECOURSE DEBT. THE GENERAL PARTNER WILL HAVE A BASIS FOR ITS GENERAL PARTNERSHIP INTEREST EQUAL TO ITS BASIS FOR ITS MEMBERSHIP INTEREST PLUS THE OTHER MEMBER’S SHARE OF THE RECOURSE DEBT. THE LP'S BASIS FOR ITS ASSETS WILL BE THE SAME AS THE BASIS THE LLC HAD FOR THE ASSETS PLUS ANY GAIN RECOGNIZED BY THE MEMBERS. THE PENNSYLVANIA TAX CONSEQUENCES SHOULD BE THE SAME AS THE FEDERAL TAX CONSEQUENCES.

CORPORATION TO LLC AND LLC TO CORPORATION

CORPORATION TO LLC – WILL BE VERY RARE

THERE WILL BE DOUBLE TAX. THE CORPORATION IS TREATED AS IF IT SOLD ITS ASSETS FOR THEIR FAIR MARKET VALUE. GAIN OR LOSS IS RECOGNIZED BY THE CORPORATION IN THE AMOUNT OF THE DIFFERENCE BETWEEN THE FAIR MARKET VALUE OF THE ASSETS AND THEIR TAX BASIS. ALSO THE SHAREHOLDERS ARE TAXED ON THE EXCESS OF THE FAIR MARKET VALUE OF THE ASSETS OVER THEIR TAX BASIS FOR THEIR SHARES. THE MEMBERS WILL HAVE A FAIR MARKET VALUE BASIS FOR THEIR MEMBERSHIP INTERESTS. THE LLC WILL HAVE A FAIR MARKET VALUE BASIS FOR ITS ASSETS. FOR S-CORPS, THE GAIN OR LOSS RECOGNIZED BY THE CORPORATION ON THE DIFFERENCE BETWEEN THE FAIR MARKET VALUE OF THE ASSETS AND THEIR TAX BASIS WILL BE PASSED THROUGH TO THE S-CORP SHAREHOLDERS.

LLC TO CORPORATION

THE CONVERSION WILL BE TAX-FREE UNLESS THE LLC’S ASSETS ARE ENCUMBERED BY DEBT THAT EXCEEDS THEIR BASIS. THE CORPORATION’S TAX BASIS FOR THE ASSETS WILL BE THE BASIS THAT THE LLC HAD FOR THOSE ASSETS PLUS ANY GAIN RECOGNIZED. THE SHAREHOLDERS BASIS FOR THEIR STOCK WILL BE THEIR BASIS FOR THEIR MEMBERSHIP INTERESTS LESS THEIR SHARE OF THE LLC’S DEBT PLUS ANY GAIN RECOGNIZED. THE SHAREHOLDERS WILL RECOGNIZE GAIN TO THE EXTENT THAT THEIR SHARE OF THE LLC’S DEBT EXCEEDS THEIR BASIS FOR THEIR MEMBERSHIP INTEREST.

FEDERAL AND PENNSYLVANIA INCOME TAX CONSEQUENCES OF STATE ENTITY CONVERSIONS

13

CORPORATION TO LP AND LP TO CORPORATION

CORPORATION TO LP – WILL BE VERY RARE

THERE WILL BE DOUBLE TAX. THE CORPORATION IS TREATED AS IF IT SOLD ITS ASSETS FOR THEIR FAIR MARKET VALUE. GAIN OR LOSS IS RECOGNIZED BY THE CORPORATION IN THE AMOUNT OF THE DIFFERENCE BETWEEN FAIR MARKET VALUE OF THE ASSETS AND THEIR TAX BASIS. ALSO THE SHAREHOLDERS ARE TAXED ON THE EXCESS OF THE FAIR MARKET VALUE OF THE ASSETS OVER THEIR TAX BASIS FOR THEIR SHARES. THE PARTNERS WILL HAVE A FAIR MARKET VALUE BASIS FOR THEIR PARTNERSHIP INTERESTS PLUS THEIR SHARE OF THE PARTNERSHIP’S NON RECOURSE DEBT. THE PARTNERSHIP WILL HAVE A BASIS FOR ITS ASSETS EQUAL TO THE FAIR MARKET VALUE OF THE ASSETS FOR S-CORPS, THE GAIN OR LOSS RECOGNIZED BY THE CORPORATION ON THE DIFFERENCE BETWEEN THE FAIR MARKET VALUE OF THE ASSETS AND THEIR TAX BASIS WILL BE PASSED THROUGH TO THE S-CORP SHAREHOLDERS.

LP TO CORPORATION

THE CONVERSION WILL BE TAX-FREE UNLESS THE PARTNERSHIP’S ASSETS ARE ENCUMBERED BY DEBT THAT EXCEEDS THEIR BASIS. THE PARTNERSHIP’S TAX BASIS FOR THE ASSETS WILL BE THE BASIS THAT THE PARTNERSHIP HAD FOR THOSE ASSETS PLUS ANY GAIN RECOGNIZED. THE SHAREHOLDERS BASIS FOR THEIR STOCK WILL BE THEIR BASIS FOR THEIR PARTNERSHIP INTERESTS LESS THEIR SHARE OF THE PARTNERSHIP’S DEBT PLUS ANY GAIN RECOGNIZED. THE SHAREHOLDERS WILL RECOGNIZE GAIN TO THE EXTENT THAT THEIR SHARE OF THE PARTNERSHIP’S DEBT EXCEEDS THEIR BASIS FOR THEIR PARTNERSHIP INTEREST.

14

Conversion of Entities under Pennsylvania Law

William H. Clark, Jr. Drinker Biddle & Reath LLP

One Logan Square Philadelphia, PA 19103

(215) 988-2804 [email protected]

15

mailto:[email protected]

16

• Since July 1, 2015, Pennsylvania has authorized the conversion of entities from one form to another.

• The conversion provisions are found in 15 Pa.C.S. Subch. 3E and are part of a complete set of inter-entity transaction provisions.

• The provisions of 15 Pa.C.S. Ch. 3 apply to transactions involving only Pennsylvania entities and also those involving an entity organized under the law of a foreign jurisdiction that permits inter-entity transactions.

16

17

conversion (I) (single state)

L.P. A

(PA)

LLC A

(PA)

18

conversion (II) (multi-state)

L.P. A

(DE)

LLC A

(PA)

19

The only trick to using the new provisions is

learning a new vocabulary:

– governor

– interest

– interest holder

– organic law

– organic rules

– private organic rules

– public organic record

– “entity” v. “association”

19

20

– Governor: a person by or under whose authority

the powers of an association are exercised and

under whose direction the activities and affairs of

the association are managed pursuant to the organic

law and organic rules of the association. For

example:

• director of a business corporation

• manager of a manager-managed LLC

• member of a member-managed LLC

20

21

– Interest: a share in a corporation for profit, a

membership or share in a corporation not-for-profit,

a governance interest, or a distributional interest.

For example:

• share in a business corporation

• membership interest in an LLC

– Interest holder: a direct or record holder of an

interest. For example:

• shareholder of a business corporation

• member of an LLC

21

22

– Organic law: the law of the jurisdiction of formation of an association governing its internal affairs. For example:

• the Business Corporation Law of 1988

• the Limited Liability Company Law of 1994

– Organic rules: the public organic record and private organic rules of an association. For example:

• articles and bylaws of a business corporation

• certificate of formation and operating agreement of an LLC

22

23

– Private organic rules: the rules that govern the

internal affairs of an association, are binding on all

its interest holders and are not part of its public

organic record, if any. For example

• bylaws of a business corporation

• operating agreement of an LLC

– Public organic record: the document the public

filing of which by the department or a similar

agency in another jurisdiction is required to form an

association. For example:

• articles of a business corporation

• certificate of formation of an LLC

23

24

• An “entity” is a domestic or foreign organization of a type whose organic law is found in Title 15.

• In contrast, “association” is a broader term that includes any type of private organization, whether domestic or foreign.

– A banking institution is an association but not an entity.

“entity” v. “association”

association entity

25

• The definitions just discussed are found in 15 Pa.C.S. § 102.

– Thus, they apply to all of Title 15 and all of the Pennsylvania business entity laws.

• Definitions applicable just to Chapter 3 relating to fundamental transactions appear in 15 Pa.C.S. § 312.

– These definitions are mostly unremarkable and simply facilitate the wording of Chapter 3.

– Three definitions are worth noting and will be discussed later:

• “interest holder liability”

• “protected agreement”

• “protected governance agreement”

25

26

procedures generally

• The statutory provisions for conversions parallel the provisions for other types of transactions under Ch. 3: – authorization of the transaction

– preparation of a plan

– approval of the plan by the governors and interest holders

– amendment or abandonment of the plan

– filing and effectiveness

– effect of the transaction

• Substantive approval requirements under current law continue unchanged. – These are collected in a separate Subchapter 3B and

organized by type of entity.

26

27

• Note that the general rule in Pennsylvania is that approval of a fundamental transaction requires the affirmative vote of a majority of the votes cast (which excludes abstentions) at a meeting at which a quorum is present.

• This is in marked contrast to Delaware where approval requires the affirmative vote of a majority of the outstanding interests.

27

28

• Dissenters rights are available for shareholders

on a conversion.

• Statutory dissenters rights are not available for

interest holders in entities that are not business

corporations.

• Contractual dissenter rights are available for

interest holders in entities that are not business

corporations. See 15 Pa.C.S. § 317.

dissenters rights

28

29

• 15 Pa.C.S. § 329 permits a plan to classify interest holders into groups on a basis other than the class or series of interest that they hold and provide mandatory treatment for members of the group.

• This “special treatment” will be respected if either:

1. the interest holders receiving special treatment have either:

• a class vote, or

• dissenters rights

2. a court of competent jurisdiction finds that the special treatment was undertaken in good faith, after reasonable deliberation and was in the best interest of the association.

special treatment

30

• The concept of a “protected agreement” or “protected governance agreement” provides transitional protection.

• These concepts are defined in 15 Pa.C.S. § 312 as follows:

“Protected agreement.” Either of the following:

(1) A record evidencing indebtedness and any related agreement in effect on July 1, 2015.

(2) A protected governance agreement.

“Protected governance agreement.” Either of the following:

(1) The organic rules of a domestic entity or foreign association in effect on July 1, 2015.

(2) An agreement that is binding on any of the governors or interest holders of a domestic entity or foreign association on July 1, 2015.

protected agreements

31

• If such an agreement deals with a merger, the agreement is deemed to apply to a conversion.

• The notion is that, if people contracted for special rules or protections in the event of a merger at a time when conversions were not authorized, they are deemed to have wanted the same special arrangements for a conversion.

– Underlying the concept is a recognition that a conversion could previously have been accomplished by using a merger.

32

interest holder liability

• Interest holder liability is defined in 15 Pa.C.S.

§ 312 and is personal liability for either:

– a liability of an association as a result of being an

interest holder; or

– an obligation to contribute to the association

imposed by the organic rules.

• A transaction must be approved by any person

that will have interest holder liability following

the transaction.

32

33

33

General Partnership

Corporation

General Partnership

General Partnership

Corporation

Corporation

A B

B A

A B

B A

Thank you for attending

Questions?

ballardspahr.com drinkerbiddle.com

http://www.ballardspahr.com/

http://www.drinkerbiddle.com/

Documents

Why LLCs are Now the Entity of Choice in Pennsylvania · 31/12/2014 · Why LLCs are Now the Entity of Choice in Pennsylvania Webinar Noon-1 p.m. June 1, 2016 Wendi Kotzen, Partner