The new Pennsylvania Entity Transactions Law, which went into effect on July 1, 2015, brings Pennsylvania in line with many other states in allowing for simple, statutory entity conversions.
Prior to enactment of this new law, Pennsylvania law did not have a mechanism allowing an entity (corporation, partnership, LLC) to directly change into another type of entity. Other mechanisms, such as a merger, could accomplish the same goal, but this new process will make such transactions simpler and easier.
Under the new law, among other things, Pennsylvania and, under certain circumstances, foreign entities may undergo the following conversions:
- A domestic entity may become a domestic entity of a different type (for example, a Pennsylvania corporation may become a Pennsylvania LLC).
- A domestic entity may become a foreign association of a different type provided the conversion is authorized by the law of the foreign jurisdiction (for example, a Pennsylvania corporation may become a Delaware LLC).
- A foreign entity may become a Pennsylvania entity of a different type provided conversion is authorized by the law of the foreign entity’s jurisdiction of formation (for example, a Delaware corporation may become a Pennsylvania LLC).
Generally, a converting entity is treated as if it is the same business it was before the conversion. All debts, obligations, and liabilities of the converting entity continue as debts, obligations, and liabilities of the converted entity. Furthermore, conversion does not, in itself, constitute a change of control of the converting entity; give rise to rights a third party would have upon the transfer of assets, merger, dissolution, liquidation, or winding up of the converting business; or give rise to any rights that any person would have on dissolution, liquidation, or winding up of the converting entity.
While there are many reasons that a business might desire to convert to a different type of entity, the most common reason is tax considerations. While there are situations in which a conversion might not result in material tax costs (such as the conversion of an S corporation to an LLC), significant tax costs can result from certain conversions. Prior to initiating any conversion, the tax impacts should be carefully reviewed with tax counsel.
Michael Vizzini, a summer law clerk, assisted with the preparation of this article.