Pennsylvania is becoming an easier place to do business – for both emerging and established companies.  The Entity Transactions Law ("ETL"), effective July 1, 2015, ushers in a simplified, state-of-the-art regime for Pennsylvania businesses engaging in fundamental transactions.

Two features of the new law are likely to decrease costs and increase efficiency.  First, the ETL streamlines certain fundamental business transactions.  For example, conversions are greatly simplified.  A "conversion" is used when a business wants to change from one entity form to another, such as changing from a LLC into an S corporation.  Under prior Pennsylvania law, a business owner (and his or her legal team) had to create an S corporation and then merge the LLC into the S corporation – often a complex and costly process.  Under the ETL, a conversion is a simple, single-step transaction.

Second, the ETL provides uniform procedures for businesses undertaking four kinds of fundamental transactions:

  • Mergers of one entity into another;
  • Conversions of one entity into another form of entity;
  • Interest Exchanges between two entities (which permit one entity to control another without requiring a merger); and
  • Domestications in Pennsylvania of an entity originally formed in another state.

Under prior Pennsylvania law, each different entity form (corporation, LLC, partnership, etc.) had to comply with its own set of governance rules.  The inconsistent treatment caused increased complexity and transaction costs when different types of entities engaged in certain transactions with one another. Under the ETL, common provisions apply across entity forms, governing fundamental transactions among them and sharing an approach and vocabulary for approving such transactions.  The result is intended to make such transactions simpler, reduced costs and promote corporate growth.

The ETL was signed into law by Governor Corbett as Act 172 in October 2014.  It was drafted by a committee of the Business Law Section of the Pennsylvania Bar Association and based on the Model Entity Transactions Act and Article 1 of the Uniform Business Organizations Code.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.