Legislature(1995 - 1996)
02/08/1996 01:35 PM Senate L&C
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* first hearing in first committee of referral
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+ teleconferenced
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SENATE LABOR AND COMMERCE COMMITTEE
February 8, 1996
1:35 P.M.
MEMBERS PRESENT
Senator Tim Kelly, Chairman
Senator John Torgerson, Vice Chairman
Senator Mike Miller
Senator Judy Salo
MEMBERS ABSENT
Senator Jim Duncan
COMMITTEE CALENDAR
SENATE BILL NO. 186
"An Act relating to partnerships; amending Alaska Rules of Civil
Procedure 20 and 24; and providing for an effective date."
PREVIOUS SENATE COMMITTEE ACTION
SB 186 - No previous action to consider.
WITNESS REGISTER
Peter Denn
Belloit & Touche
550 W. 7th, Ste. 1500
Anchorage, AK 99501
POSITION STATEMENT: Supported SB 186.
Bill Azel
Washington, D.C.
POSITION STATEMENT: Commented on SB 186.
Joe Shierhorn, Vice President
North Rim Bank
3111 C Street
Anchorage, AK
POSITION STATEMENT: Commented on SB 186.
Willis Kirkpatrick, Director
Division of Banking
Department of Commerce & Economic Development
P.O. Box 110807
Juneau, AK 99811-0907
POSITION STATEMENT: Commented on SB 186.
George Elgee, CPA
9309 Glacier Hwy
Juneau, AK 99801
POSITION STATEMENT: Commented on SB 186.
ACTION NARRATIVE
TAPE 96-10, SIDE A
Number 001
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.
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