Legislature(1995 - 1996)
02/08/1996 01:35 PM L&C
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
SL&C 2/08/96 SB 186 LIMITED LIABILITY PARTNERSHIPS CHAIRMAN KELLY called the Senate Labor and Commerce Committee meeting to order at 1:35 p.m. and announced SB 186 to be up for consideration. SENATOR KELLY asked if the bankers and accountants had agreed on a CS. SHERMAN ERNOUF, Legislative Aide to Senator Kelly, said they had agreed. SENATOR KELLY said it was the intention of the Committee to listen to testimony today and then have staff develop a CS based on the agreements that have been made and on the recommendations that Mr. Willis would be making. PETER DENN, Alaska Society of CPA's, supported SB 186. He said a Limited Liability Partnership (LLP) would benefit small and growing businesses in Alaska and enhance the business environment. Choosing the form a business will take has broad implications; it will affect how the business is conducted, the affairs of its owners, and impact the employees. To continue to attract and retain business to Alaska, it is important that Alaska provides a full choice of forms in which businesses may operate. LLP is a new type of general partnership that is beginning to sweep the nation. Thirty eight states and the District of Columbia have already adopted LLP legislation. Twelve additional states, including Alaska, are now considering LLP legislation. The LLP form is appealing particularly to the segment of the economy that's growing the fastest - small businesses and start-up ventures. This is because of its low start-up cost, its flexibility, and its relative ease of operation. LLP's provide a flexible form of organization for small businesses helping them to obtain parity with larger, better capitalized organizations which can afford the ancillary benefits of more complicated business organization, like require articles of incorporation, bylaws, Board of Directors, Board of Directors meetings, etc. It is taxed like a partnership, being that the tax liability flows through directly to the LLP partners. It has partial limited liability which means that individual partners in an LLP are not personally liable for the debts and obligations of the LLP arising out of errors, omissions, negligence, incompetence, or malfeasance committed in the course of the partnership business by another partner or representative of the partnership not working under their direct supervision. All partners continue to be personally liable for their own acts and omissions and the acts and omissions of the persons over whom they have control. All partners also continue to be personally liable for all other debts and obligations of the partnership. The LLP, itself, remains liable for all the actions of its owners and employees and the LLP ownership remains personally liable for their own actions and the actions of those under their control. Beyond any investment in the LLP, itself, the personal assets of the owners and their families may not be sacrificed to pay judgements arising from an action over which they have no control. Other types of organizations such as corporations, professional corporations, and limited partnerships provide far more comprehensive protection for the personal assets of the business owner and generally protect owners from any action against the entity. They also carry with them significant costs and require a level of sophistication to set up and operate. Consequently, the LLP should appeal to the types of business today that are operating as partnerships and cannot afford, or do not have the time, to deal with statutory and regulatory requirements. From Alaska's perspective, it will be a tremendous advantage to offer business the LLP form because it is business development oriented, it enables businesses within the State to be competitive with businesses outside the State and abroad, it is consistent with public policy positions already adopted by the State, and its adoption would provide a favorable business climate and will especially benefit that portion of the economy that has potential to grow the fastest - small business and start-up ventures. An LLP law would enable Alaska to make available an organization form that is available to four fifths of the nation and allow businesses that are already here to compete with out-of-state firms. Number 161 SENATOR KELLY asked if the tax liability was similar to a sub S corporation. MR. DENN answered yes, that the tax liability falls to the partners. SENATOR KELLY said that it wouldn't be taxed by the State of Alaska. MR. DENN said the individuals within the partnership would be taxed. SENATOR KELLY clarified he meant that if we don't have an income tax in Alaska, then you're not taxed. SENATOR TORGERSON asked if there was a limit to how big the partnership could be in numbers or dollars. MR. DENN said there was no limit that he was aware of. SENATOR KELLY asked if the original impetus for this legislation came from a problem with some of the big accounting firms having problems on one side of the nation and everyone being liable for it. MR. DENN said he does have an interest in that problem as a CPA in one of the big six firms. BILL AZEL, Belloit and Touche, said he has worked in Washington D.C. as the chairman of a coalition made up of the big six accounting firms and the American Institute of Certified Public Accountants. He said any large firm that has practiced in multiple states has had an interest in this legislation, because the LLP allows the firms to organize and practice across a variety of states with a consistent level of protection to the personal assets of those uninvolved partners that might otherwise be subject to claims for actions arising from a partner across the country. Number 209 JOE SAHIERHORN, Vice President, North Rim Bank, said he is the current president of Alaska Bankers Association. He said he has been working on this legislation for several years and does support it. He said it does promote business in the State. Number 250 SENATOR MILLER asked if he knew how many corporations Alaska has now that are chapter C corporations that would take advantage of this legislation. He was concerned that the State would loose revenues if C corporations switched to LLP's and quit paying corporate taxes. WILLIS KIRKPATRICK, Director, Division of Banking, said they just provided the Department of Revenue with the number of corporations they have on file. SENATOR KELLY said that figures from the Department of Commerce say that of around 17,000 corporations, 26 percent are S corporations. MR. AZEL said the current liability protection afforded a C corporation extends protection to the owners of that business fully for tort claims as well as contractual obligations of the business. The only risk to that stockholder is his or her investment in the corporation and none of the obligations that corporation might incur would be visited upon personal assets beyond their stock holding, which could be lost in the bankruptcy of the entity. In a LLP there is the shielding of the personal assets of partners not involved in a tort action, but those partners remain liable jointly and severally for certain of the commercial obligations, leases, and loans of the partnership, itself. So, the liability protection afforded in a LLP are less than the liability protection afforded a C corporation. Entities using the LLP have been previously formed as a general partnership and have their exposure lessened somewhat for partners not involved in the acts contemplated for protection under this bill. Number 308 SENATOR KELLY asked if two C corporations form a LLP under this bill. MR. KIRKPATRICK replied, by definition, if they are persons, which they are under Alaska statute, they could. SENATOR KELLY said their concern and worst fear would be of an ARCO/BP LLP and the tax ramifications of that. MR. KIRKPATRICK said this was a question they had when forming limited liability corporations (LLC) a year ago - how many corporations would change to the lesser taxed corporations. They haven't seen any major switch from C corporations to LLC organizations. SENATOR MILLER noted that for every C corporation that does change there is a loss of some revenue to the State of Alaska, if they are making money. MR. DENN said in the case of two corporations forming an LLP, the income would flow to the corporations and be taxed at that level. MR. KIRKPATRICK said one of their concerns is that the registration provisions of the LLP would be administered by the Department of Commerce which administers Title 10, corporations and associations. They also administer the Uniform Limited Partnership Act. One of the things they have accomplished over the years is efficiencies through standardization. All of the corporate entities, whether they are non-profit, domestic, foreign, or co-ops, etc., are all administered under the same type of system. MR. KIRKPATRICK asked them to consider picking up the existing law of administering registration of these business organizations and apply them to the administration of filings within SB 186. SENATOR TORGERSON asked if he had shown them to the people on teleconference. MR. KIRKPATRICK responded that if the teleconference people are practicing CPA's, they have seen them when filing with the Department their corporate bi-annual reports or any other types of reports they would file. SENATOR KELLY said the amendments would be faxed to them today. MR. KIRKPATRICK offered his help and the help of Mr. Monagle to work on this legislation, saying they were not against it. SENATOR TORGERSON noted there should be a different fiscal note representing the changes. MR. KIRKPATRICK said the $0 fiscal note was prepared on the basis that they wouldn't have to change their operation. So there would be no fiscal impact if the amendments were adopted. There would possibly be a minor fiscal impact on the Department, if the amendments weren't adopted, but it wouldn't be significant. SENATOR KELLY asked if the amendments were adopted, would the filing fees more than cover the costs of their administration. MR. KIRKPATRICK replied that they would more than cover the cost. SENATOR KELLY asked if they would require a new PCN position to cover this. MR. KIRKPATRICK said they would not. SENATOR KELLY added then, that if they adopt at least some of the amendments, they would be talking about a positive fiscal note to the State. Number 390 SENATOR MILLER noted that if these are corporate fees that are changing over, they would be loosing the filing fee on that end of the spectrum. He wasn't totally comfortable with this. He said they also didn't have the Department of Revenue fiscal note which would tell them what the change would actually be. SENATOR KELLY asked Mr. Kirkpatrick to prepare another fiscal note assuming the committee adopted at least the filing fee portion of his amendments. He asked staff to get a fiscal note from the Department of Revenue. Number 406 GEORGE ELGEE, CPA, said a couple of issues have come up with taxation converting from a C corporation to a LLP. To convert from the C corporation to anything below it - subchapter S or a partnership, there is a very hefty built-in gains tax. So basically, you would have to dissolve your corporation just as if you were selling your assets at fair market value and pay tax on those assets. No one would do that, especially not large corporations, because it would be cost prohibitive. Another reason you would want to remain a C corporation vs. a partnership, is that there are a lot of tax deductions available for C corporations right now. Medical benefits, for instance, are a tax deduction at a corporate level, and they are not a deduction at a partnership level. Generally, MR. ELGEE said, there are not many people who would want to switch. If you were going to switch from a C corporation, you would probably go to an S corporation, but S corporations are treated very similar to partnerships. The same deductions that are allowed a C corporation are not allowed in an S corporation. An S corporation is taxed almost identical to a partnership. That's why there aren't that many people switching from C corporations down to S corporations. SENATOR KELLY noted that S corporations are limited to 35 shareholders. MR. ELGEE said there is a proposed amendment in Congress now to raise that to 70. SENATOR MILLER said he thought the biggest group to use this would be accountants, doctors, lawyers, and professional corporations who are usually taxed at 39 percent. He asked if the State of Alaska has the same corporate rate. MR. ELGEE replied that it was the same as all the other corporations; just the federal government was at a higher rate. MR. ELGEE said there would not be a lot of people within the State of Alaska jumping on this. The reason is the professional corporations have the ability to be S corporations right now. The emphasis in this statute is to give foreign corporations, or foreign partnerships, the ability to conduct business in Alaska and still be registered in New York. SENATOR KELLY asked Mr. Willis to provide the Committee with information on the percentage of S corporations in Alaska and differences between the number of non-profits and C corporations. SENATOR KELLY said staff would work with the interested parties on this issue and adjourned the meeting at 2:07 p.m.