PENNSYLVANIA’S NEW ENTITY TRANSACTION LAW MAKES IT EASIER TO CONVERT A LLC TO A CORPORATION

On July 1, 2015, Pennsylvania’s new Entity Transaction Law went into effect and made it easier, faster, and cheaper for business entities to engage in “fundamental transactions” with another business entity. Examples of fundamental changes include a merger of one company into another, an amendment of a company’s articles of incorporation or converting your existing “corporate form” into another business entity. Previously, this took a lot of time and was costly. Now this can be done quickly and cheaply.

The new Entity Transaction Law sets forth five (5) fundamental business transactions that may now take place irrespective of the form of either business entity involved:

• Merger of one entity with or into another business entity;
• Conversion of one type of entity to another type of business entity (e.g. a business corporation converts to a limited liability company);
• Interest exchange between two entities such that one business entity is controlled by the other without actually merging the two business entities;
• Division of one existing entity into two or more resulting types of associations; and
• Domestication into Pennsylvania of a foreign business entity originally organized in another state (i.e. converting your DE corporation into a PA corporation).

This is a great opportunity for early stage growth companies. Under the old law, if you wanted to change the form of your existing business entity to make it more attractive for potential investors, you had to wind down the business affairs of your existing company by satisfying all existing obligations, dissolve the company and then form a new company.

This long delay would hurt principals of the early stage companies who, for example, may have originally formed their venture as a LLC for tax reasons but now need to convert to a corporation to satisfy requirements of potential investors. As a result of this rigid approach, PA businesses would flee to Delaware where its statutory scheme afforded business entities the flexibility to change its form; be it through merger, conversion or any other manner set forth above without the need to dissolve. With the enactment of this new Entity Transaction Law, this is no longer the case and makes Pennsylvania a more attractive option.

It is important to note that this new law has no effect on how the transaction will be treated from a tax perspective. Some transactions may be tax free exchanges whereas other transactions may trigger immediate tax recognition. It is important to meet with tax counsel to structure these changes properly before you make any of these fundamental business changes. If you have any questions regarding this or any other aspect affecting your business, please feel free to contact us at Danziger Shapiro.

This entry is presented for informational purposes only and does not constitute legal advice.