[Portions of this article are based upon an article I wrote for and which
was published in the December, 2018 Pennsylvania Bar Association Solo
& Small Firm
Newsletter and the January, 2019
Pennsylvania Bar News. ---KPM]
For decades, business professionals shunned Pennsylvania because its entity
laws were some of the oldest in the country. Pennsylvania was one of the
last to modernize its regulations regarding the means by which entities
could be modified or restructured. Over the past five years, however,
Pennsylvania has passed a series of laws which have vaulted the Commonwealth
into one of the most progressive states in the nation in terms of entity
transformation and flexibility. In the following series of questions and
answers, I will provide examples of how these changes in Pennsylvania
entity law can be a benefit--and a possible trap for the unwary.
Can I change my entity form after I start my business? Until a few years ago, the answer would have been "no." For
example, if you had formed a corporation and wanted to change it to a
limited liability company, you would have had to dissolve the corporation
and then form the limited liability company as a new entity. It was time-consuming
and expensive. Now, Pennsylvania has adopted a streamlined procedure which
allows you to "convert" your corporation into a limited liability
company. The Pennsylvania Bureau of Corporations and Charitable Organizations
("the Corporation Bureau") has adopted and approved for use
simple conversion forms. Using these forms takes away the necessity of
having to formally dissolve the corporation. This translates into savings
of many weeks of time and hundreds, if not thousands, of dollars in professional
fees required for proper dissolution.
Is the conversion process the only change? No. Simplified entity conversion is only one example of Pennsylvania becoming
a leader in terms of entity flexibility and innovation. Other examples
are the relative ease of changing the domesticity of the entity (e.g.,
from an Arizona entity to a Pennsylvania entity), or merging one company
with another company, even if the two companies are different types of
entities, and even if the the merged company becomes a third type of entity.
What other professionals/ individuals should be involved in deciding the
entity form? The recent developments in Pennsylvania entity law, and the relative ease
of filing entity forms are as much a trap as they are a convenience. When
there were limited options and relatively stable tax situations, it was
fairly easy to select an entity just by marshalling some background information
about the financial and general circumstances of the people forming the
entity, and by briefly consulting with the accountants or financial advisors
of the interested parties. Now, with so many entity options available,
with the rapidly changing laws and regulations in virtually every field
of business, and with equally rapid changes in overarching insurance,
employment, tax and long-term planning disciplines, a person trying to
form even the simplest entity without professional help can easily miss
something important or make a mistake far more costly than the fees the
person would have paid to the professional advisor(s).
Therefore, when a potential client asks me about forming or changing a
business entity, I always take an holistic approach. I start with an initial
client consultation. During the consultation, I obtain a comprehensive
picture of the personal situation of the client, the purpose of the entity
to be formed, and the history of the business (if already existing). I
will want to understand the way the company will be financed, mangaged
and operated, and I will want to know the short-term and long-term plans
of both the client, including an exit strategy. Then I usually advise
the client that, before finalizing anything, we will want to consult with
the client's accountant and other professional advisors, as well as
anyone else who can provide insight into the client's situation.
Won't this be expensive? Will I really want to go to all this trouble
just to form a simple corporation or limited liability company? There is little doubt that following my suggested procedure will cost
more than simply having your tax preparer or a service such as
LegalZoom, fill in and file some forms. However, you must remember that the primary
purpose of forming a business entity is to minimize the risk of your being
held personally liable for claims and obligations arising from the ownership
and operation of the business. If the entity you form is not properly
formed and maintained, creditors and claimants could "pierce the
entity veil," and your personal assets will be at risk, i.e., the
one thing you were trying to prevent. Moreover, if you don't take
into consideration everything else going on in your life, and if you don't
make sure your lawyer's efforts dovetail with what your other advisors
are having you do, you could find yourself with significant additional
taxes or other costs. In most cases, it will make sense to spend a little
more time and money up front, than to spend a lot of time and money dealing
with a problem that could have been avoided.
----Ken Milner