Legislature(1995 - 1996)

02/08/1996 01:35 PM L&C

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
               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             
 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                 
 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               
 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.                             

Document Name Date/Time Subjects