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Scam Alert for Pennsylvania Business Owners

Written by Joanne Murray Wednesday, August 26 2015 07:54

Scammers targeting Pennsylvania businesses have been hard at work this summer. The Pennsylvania Department of State reports that three separate direct mail campaigns have sought to get unsuspecting Pennsylvania  business owners to pay unnecessary fees:

• A mailing from a company calling itself “Division of Corporate Services – Compliance Division” urges companies to complete a form with officer and director information and return the form with a $150 payment.

• A postcard from a company calling itself “Business Compliance Division” urges owners to call a toll-free number “to avoid potential fees and penalties.” When that number is called, the owner is instructed to pay $100 by credit card to obtain a “certificate of existence” in order to comply with state regulations. The address for this company is the same as the address for the “Division of Corporate Services – Compliance Division” above. According to the Pennsylvania Department of State, this is the address of a UPS store in Harrisburg.

• A letter from a company calling itself “Pennsylvania Council for Corporations” instructs business owners to complete a form with names of shareholders, directors and officers and return it with a $125 fee.

These solicitations include citations to Pennsylvania statutes and look official, but they are not: they were neither prepared nor authorized by the Commonwealth. Essentially, these notices represent a business-generating effort from the sender to prepare generic annual minutes for unwitting companies.

The Department of State cautions that any official notices sent to businesses by the Pennsylvania Department of State or the Secretary of the Commonwealth’s office will contain letterhead and/or contact information for the Bureau of Corporations and Charitable Organizations. If you receive one of these notices or a similar solicitation, contact the Bureau at 717-787-1057, or feel free to call Sue Maslow, Joanne Murray or Michael Mills at 215-230-7500.

On July 1, 2015, the Pennsylvania Association Transactions Act (also known as the Entity Transactions Act) (the “Act”) went into effect. The primary purpose of the Act is to simplify the architecture of Title 15 of the Pennsylvania Consolidated Statutes by moving the provisions applicable to names, fundamental transactions and registration of foreign entities into a new Chapter 3. Presently, those provisions are spread out in numerous subsections applicable to each entity type (e.g., corporations, limited liability companies, etc.). The thinking was that since identical or nearly identical provisions already applied to most or all entity types, they should be moved to a new chapter to streamline the statute and hopefully simplify the process for undertaking fundamental changes. The Act adopts new terms to refer to various entity concepts, so practitioners will have to learn a new vocabulary. For example:

  •  Association: a corporation for profit or corporation not-for-profit, partnership, limited liability company, statutory or business trust, or an entity or two or more persons associated in a common enterprise.
  • Governor: a person by or under whose authority the powers of an association are exercised and under whose direction the activities and affairs of the association are managed (e.g., a corporate director, the general partner of a limited partnership, a partner of a general partnership, a manager of a manager-managed LLC, etc.).
  • Interest holder: a direct or record holder of an interest (e.g., a shareholder, member, general or limited partner).

    While much of the Act is simply a reorganization of the statute, some changes are substantive. For example, the Act expands the use of conversions. In a conversion transaction, one Pennsylvania entity type converts to another Pennsylvania entity type. Until now, this result could be accomplished by using a 2-step process: forming a new entity of the desired type and merging the old entity into it. Alternatively, a business seeking to change its form would have to wind down its business and dissolve, then start again by forming a new entity type. Both approaches were cumbersome and can involve significant transaction fees and delays so the new one-step process is welcomed. But even the simplified conversions can have tax consequences, so a tax advisor should be consulted.

    At the opposite end of the transaction spectrum is the division transaction. Prior to the Act, an entity could only divide into like entity types. The Act permits an entity to divide into different entity types (e.g., a corporation can now divide into a corporation and a limited liability company). Once again, care should be taken to avoid unintended tax consequences.

    Another significant change is a new provision that allows for contractual dissenters rights where such rights would not otherwise be available under the statute. Additionally, the existing concept of share exchanges is expanded to include other association types and bundled into a new subchapter called “Interest Exchanges.”

    All of the transactions included in new Chapter 3 require a plan approved by the interest holders of the constituent associations, although the approval process and plan contents vary depending on the type of association. Many of these transactions have tax consequences for the entity and/or the interest holders, so the advice of tax counsel is critical.

    The Act is based on the Model Entity Transactions Act (known as META). The Pennsylvania Bar Association’s Section on Business Law, which drafted the Act, continues its work to modernize the remainder of Pennsylvania’s association statutes to make them consistent with the uniform laws passed in other states.

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