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Another New Entity Law in Pennsylvania

Pennsylvania: A large state with a diverse population to match, with big cities such as Philadelphia and Pittsburgh, small manufacturing and mining towns, farmlands, distributors and middle-America retailers all within its borders. One would think that it would be an ideal home state for all sorts of businesses. Instead, attorneys, accountants and financial planners all steer their clients--and their capital--to Delaware. Yes, Delaware's favorable tax treatment is a significant reason for Pennsylvania being passed over in favor of its diminutive neighbor; but that is only part of the rationale: Another reason is that Delaware has business entity laws which are iconic in their providing of flexibility and ease of governance to businesspeople.

But Pennsylvania has itself become a leader in modernizing its entity laws. First came the law which provided for the establishment of Benefit Corporations, which allow for directors to make decisions which include positive environmental and social impact as well as shareholder profit. Next was the entity law of July, 2015, which eased the way for entities to change their structures and home bases. Now comes Act 170, which revises laws on partnerships, limited liability companies, and the establishment of Nonprofit Limited Partnerships and Benefit LLCs. Act 170 becomes generally effective on February 21, 2017. (Some limited liability company can elect to become subject to the new law on April 1, 2017.)

A good portion of the new law is directed toward remedies of creditors and claimants of a partner in a partnership or a member of a limited liability company. A judgment creditor generally can apply to a court to obtain a "charging order" against an individual partner of a partnership or member of a limited liability company. Though the concept of charging orders has been around since the beginning of the 20th century, the new act clarifies the scope of a charging order and the methods by which it can be enforced. It should also be noted that a charging order can follow the interest of the debtor/member who transfers his/her/its interest to a third party.

Perhaps the most important change in the law, however, relates to the expanded protection which partners in limited liability partnerships will now enjoy: A partner in a limited liability partnership is now no longer liable for the acts of other partners, even if a partner is a supervisor of another partner in a particular matter. Moreover, there is no longer a requirement that the limited liability partnership maintain a minimum amount of insurance for the entity or the partners to avoid liability for another partner's actions. Even general partners of certain limited partnerships will have expanded protections from liability.

Critics of the 2015 law will have the same concerns with Act 170: There appears to be a continued narrowing of the rights of creditors and claimants, making it difficult--if not impossible--to make themselves whole when the assets of a wrongdoer are tied up in any sort of limited liability entity. Between the new act and the 2015 law, creditors and claimants will find themselves left with limited remedies or remedies which will be very expensive to enforce.

-----Ken Milner