Legislature(1993 - 1994)

03/23/1994 01:15 PM JUD

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
txt
  HB 420 - LIMITED LIABILITY COMPANIES                                         
                                                                               
  Number 332                                                                   
                                                                               
  CHAIRMAN PORTER:  "The next bill for consideration is HB
  420.  We are in teleconference for this bill, and we have,                   
  initially, the bill sponsor, Rep. Therriault.  Welcome, Rep.                 
  Therriault.  Please tell us about your bill."                                
                                                                               
  Number 353                                                                   
                                                                               
  REP. GENE THERRIAULT, SPONSOR OF HB 420, said, "I do have a                  
  sponsor statement that I'd like to read into the record, and                 
  then on teleconference we have a number of people that have                  
  worked extensively on drafting the language of the bill and                  
  can talk to the specific legal questions that you might                      
  have.  For the record, my name is Gene Therriault, I am a                    
  State Representative to House District 33.                                   
                                                                               
  "HB 420 proposes a new hybrid form of business structure                     
  called a limited liability company that combines the tax                     
  advantages of a partnership and the liability safeguards of                  
  a corporation.  Although a combination of these two business                 
  structures is currently allowed in statute through formation                 
  of an S corporation, this structure has limitations that are                 
  avoided by LLCs.  For example, S corporations do not allow                   
  ownership by certain types of shareholders.                                  
                                                                               
  "Under current law, corporate earnings are subject to double                 
  taxation through the payment of corporate taxes and personal                 
  taxes after distribution of dividends.  LLCs avoid this                      
  double taxation by allowing earnings to flow through to                      
  individual owners in the same manner partnership income is                   
  handled.  Although businesses can be organized through an S                  
  corporation to avoid double taxation and encompass some of                   
  the advantages of partnerships, they do not enjoy all the                    
  advantages of partnerships when it comes to allocating                       
  income and deductions.                                                       
                                                                               
  "One of the greatest advantages is, as the name implies, the                 
  limited liability offered by the LLC structure.  With LLCs,                  
  as with regular corporations, only the company's assets and                  
  not the owner's personal assets, are at risk in business-                    
  related lawsuits.  In partnerships, so-called limited                        
  partners enjoy such protection, but general partners don't.                  
  And limited partners face restrictions on how active they                    
  can be in the business.  LLCs are designed to protect all                    
  members while imposing no limits on their involvement in                     
  operation of the business.                                                   
                                                                               
  "Thirty-four states now permit limited liability companies,                  
  and passage in most of the remaining states is expected.                     
  Wyoming passed the first LLC act in 1977.  Other states                      
  slowly followed suit until 1988, when the Internal Revenue                   
  Service issued Rev. Rul. 88-76, which classified a Wyoming                   
  LLC as a partnership for federal tax purposes, even though                   
  none of the members or managers were personally liable for                   
  any debts of the company.  Following the ruling, formation                   
  of LLCs burgeoned, with two states adopting LLC acts in                      
  1990, four in 1991, 10 in 1992 and more than 20 states                       
  introducing measures in 1993.                                                
                                                                               
  "LLCs have tended to be family businesses, professional                      
  service firms, venture capital companies, real estate                        
  businesses and start-ups.  I believe the LLC will provide                    
  these business owners with an efficient and flexible                         
  investment vehicle that allows both limited liability and                    
  federal income tax treatment as a partnership.  I introduced                 
  the bill, which is based on a prototype American Bar                         
  Association draft, with the intention of generating                          
  discussion on this topic."   Rep. Therriault added to this                   
  prepared statement:  "Since that time, I did introduce a                     
  sponsor substitute which adopted a lot of work that was done                 
  by a subcommittee of the Alaska Bar Association.  I believe                  
  some of the people that are on teleconference to be                          
  available to make comments and answer questions were                         
  involved in that re-drafting which basically took the                        
  American Bar Association draft and kind of Alaskanized it.                   
  With that, Mr. Chairman, I am available to answer any                        
  questions or we can go right to the teleconference."                         
                                                                               
  Number 418                                                                   
                                                                               
  REP. GAIL PHILLIPS:  "Rep. Therriault, would you please tell                 
  me who was on that subcommittee?  What groups were                           
  represented on the subcommittee?"                                            
                                                                               
  REP. THERRIAULT:  "I think it was a subcommittee of the                      
  Alaska Bar Association."                                                     
                                                                               
  Number 427                                                                   
                                                                               
  REP. JIM NORDLUND:  "Gene, I think this is a good bill,                      
  actually.  I considered introducing it myself, although--I                   
  understood--what I was looking into was limited liability                    
  partnership instead of limited liability company, and I'm                    
  just wondering - maybe you, or maybe somebody who is going                   
  to testify here could explain, if there is a difference."                    
  Number 446                                                                   
                                                                               
  REP. THERRIAULT:  "I believe there is a working group in the                 
  Commerce Department, somewhere in the Administration that is                 
  working on limited liability partnerships.  It's a different                 
  animal yet than this, but might be another business                          
  structure that people would have to choose from.  My wife is                 
  an attorney up in Fairbanks and she has told me that she has                 
  had a number of clients come to her and have said, `We                       
  understand there is a new form of business.  Is it available                 
  in the state of Alaska?'  So, when people go to form                         
  businesses they have a number of options of what the                         
  business structure can be.  It can be a full partnership or                  
  a sole proprietorship, limited partnership, a number of                      
  things.  This would just add one more option for them to                     
  consider when forming the business structure."                               
                                                                               
  REP. NORDLUND:  "Maybe somebody who was going to testify                     
  could explain.  I just wanted to know the difference between                 
  the two."                                                                    
                                                                               
  CHAIRMAN PORTER:  "That was one of the questions I was going                 
  to ask, myself, so we'll hope to be edified by the                           
  testimony."                                                                  
                                                                               
  REP. DAVIDSON:  "Rep. Therriault, I can certainly understand                 
  the need for favorable tax treatment at the federal level.                   
  My question is, why is this limited liability company                        
  necessary?  For example, would it allow for less responsible                 
  actions by companies that do not now have that option?                       
  Could you expand on why this additional option [is                           
  proposed], as far as forming a company is concerned, and how                 
  it would it affect the responsibilities or actions of such a                 
  company?"                                                                    
                                                                               
  Number 453                                                                   
                                                                               
  REP. THERRIAULT:  "Well, it would allow no more or no less                   
  of liability than a corporate structure does.  But the                       
  corporate structure has a disadvantage in the tax                            
  consequences.  So what we're doing is blending the liability                 
  advantages that you can get through a corporate structure                    
  with the tax benefit that you can get through a partnership.                 
  We're just melding those two together, basically."                           
                                                                               
  Number 468                                                                   
                                                                               
  REP. DAVIDSON:  "And how is the public treasury impacted by                  
  this efficiency?"                                                            
                                                                               
  Number 469                                                                   
                                                                               
  REP. THERRIAULT:  "I don't believe that the public treasury                  
  would be impacted at all.  I think there was some concern                    
  expressed at the earlier committee that maybe we would be                    
  prompting corporations who pay a corporate tax to dissolve                   
  themselves and go into an LLC structure.  If they did that,                  
  there would be some fairly serious capital gains                             
  consequences, which I think would actually preempt people                    
  from doing that.  What we're really going to do, is just                     
  give those people who are thinking of forming a new company                  
  one more option.  Now, they may have chosen a corporate                      
  structure, but I don't know that there's any way that you                    
  can really quantify what people may have done in the future                  
  when selecting those different business forms and what the                   
  potential impact could have been on the treasury."                           
                                                                               
  Number 482                                                                   
                                                                               
  REP. JAMES:  "Is it possible to determine that a lot of                      
  people that may have filed corporations will now file this                   
  LLC, and so therefore we as a state might be deprived of any                 
  corporate income tax?"                                                       
                                                                               
  REP. THERRIAULT reiterated that this would be difficult to                   
  quantify.  He was skeptical that corporations already in                     
  existence would be dissolving in large numbers to reform as                  
  LLCs.                                                                        
                                                                               
  CHAIRMAN PORTER introduced the teleconference testimony from                 
  Anchorage.                                                                   
                                                                               
  Number 501                                                                   
                                                                               
  CHARLES SCHUETZE, ATTORNEY, DAVIS & GORDON, testified via                    
  teleconference from Anchorage in support of HB 420.  Mr.                     
  Schuetze was present as a member of the legislative drafting                 
  committee for the tax section of the Alaska Bar Association.                 
                                                                               
  MR. SCHEUTZE said, "The primary purpose of the bill is to                    
  enable these companies to reorganize to have the tax                         
  characteristics of a partnership combined with the limited                   
  liability of a corporation.  In the past when business                       
  organizations have been organized they've had to make a                      
  significant compromise.  If they wanted to have all the                      
  entire panoply of tax [options of] a partnership they'd                      
  choose to be general partners but then they would be                         
  unlimitedly liable.  If they wanted to have most of the type                 
  of characteristics of a partnership they could organize a                    
  limited ownership, but still there would be a general                        
  partner who would be unlimitedly liable.  If they wanted to                  
  have most of the type of characteristics of a partnership,                   
  they could organize a limited partnership, but still there                   
  would be a general partner who would be unlimitedly liable.                  
  With S corporations, as it's been discussed, certain                         
  restrictions are imposed, on the number, the nationality,                    
  etc., and it's not exactly treated like a partnership.  C                    
  corporations of course gave unlimited liability, but the                     
  corporations could be taxed as corporations."                                
                                                                               
  MR. SCHUETZE went on to analyze HB 420 in detail.  Testimony                 
  was often difficult to discern due to paper shuffling and                    
  other background noise.  Included in his discussion was a                    
  delineation of the characteristics of an LLC as well as the                  
  advantages for estate planning for families in its use.  He                  
  concluded by introducing Brian Durrell from Anchorage for                    
  continued discussion.                                                        
                                                                               
  CHAIRMAN PORTER thanked Mr. Schuetze for his testimony.                      
  Chairman Porter requested that any teleconference                            
  participants in Anchorage who had written testimony forward                  
  a copy to the committee via telefax, 465-3834.                               
                                                                               
  Number 577                                                                   
                                                                               
  REP. THERRIAULT acknowledged that the length of the bill                     
  might give committee members pause.  He explained in detail                  
  how the bill provides default language for the formation and                 
  operation of limited liability companies.                                    
                                                                               
  Number 600                                                                   
                                                                               
  BRIAN DURRELL, ATTORNEY, BOGLE AND GATES, AND CERTIFIED                      
  PUBLIC ACCOUNTANT, testified via teleconference from                         
  Anchorage in support of HB 420.  Noting that he has served                   
  as one of the members of the working group of the joint tax                  
  and business section of the Alaska Bar Association that                      
  drafted the legislation, Mr. Durrell championed the bill as                  
  being very good for business in Alaska.  He said it would                    
  help streamline and stimulate business activity in Alaska.                   
  Mr. Durrell said the LLC would not be a substitute for                       
  partnerships or corporations but rather a choice appropriate                 
  for certain circumstances.                                                   
                                                                               
  MR. DURRELL characterized the primary distinction between an                 
  LLC and a partnership as the ability of the LLC to enjoy                     
  limited liability.   He acknowledged SB 348 which deals with                 
  the formation of a limited liability partnership but whose                   
  principles are different.  Mr. Durrell described limited                     
  partnerships in relation to LLCs.  "There are                                
  differences...primarily that a limited partnership always                    
  must have at least one general partner who would not enjoy                   
  those limitations of liability, and secondly, the management                 
  of a limited partnership would be much different because a                   
  limited partner to enjoy the benefits of the limited                         
  liability cannot be involved in the management of the                        
  limited partnership and an LLC would allow for management by                 
  the members who would also enjoy the limited liability.                      
                                                                               
  MR. DURRELL went on to contrast LLCs and corporations.  He                   
  said, "To distinguish [LLCs] from corporations, setting                      
  aside for the moment S corporations, so we're talking about                  
  a normal corporation, C corporation subject to taxation, the                 
  primary distinction is the double taxation issue.  Limited                   
  liability.  Companies would not be subject to the double                     
  taxation. If they are properly formed they are going to be                   
  taxed as a partnership with flow-through taxation and avoid                  
  the double tax that is paid by corporations.  And the last                   
  type of entity, the S corporation, which is for state law                    
  purposes no different than any other corporation, it's                       
  merely an election that is made under the federal tax code,                  
  to be taxed as a corporation, that has a flow-through tax                    
  structure much like a partnership.  But there are                            
  limitations on who can form S corporations, the number and                   
  types of shareholders; there can not be more than 35                         
  shareholders in an S corporation; the corporation                            
  shareholders cannot be nonresident aliens.  Those types of                   
  individuals, corporations, can be members of LLC.  So it has                 
  distinctions from each one of these existing business                        
  entities, and again in some instances, it may be better; in                  
  others, one of these existing entities may be a better                       
  choice.  We're simply trying to provide the business                         
  community a full array of options that should be available                   
  to them in selecting the manner in which they want to                        
  structure their business."                                                   
                                                                               
  Number 678                                                                   
                                                                               
  CHAIRMAN PORTER:  "Is it your understanding that the bill                    
  that we are considering is without significant difference                    
  from the bills that have been introduced in other states in                  
  the past?"                                                                   
                                                                               
  Number 689                                                                   
                                                                               
  MR. DURRELL:  "Well, I have not reviewed each of those 34                    
  bills that have been passed in the other states, so I can't                  
  speak from personal knowledge.  My understanding is this is                  
  very similar.  I think if we looked at each one of those                     
  bills that every state made minor variations into the bill,                  
  but the general concept is the same.  The concept being the                  
  limitation of liability afforded to members and the                          
  partnership tax attributes."                                                 
                                                                               
  Number 711                                                                   
                                                                               
  BOB MANLEY, ATTORNEY, HUGHES THORSNESS GANTZ POWELL &                        
  BRUNDIN, testified via teleconference from Anchorage in                      
  support of HB 420.  "Thank you for letting us testify, and I                 
  mean that seriously, because after running through tort                      
  reform, I imagine you guys are just sick and tired of                        
  lawyers.  I'd like to say that we're different.  We're CPAs,                 
  tax and estate planning and business lawyers that are                        
  interested in the development of the law.  We want to make                   
  more and better options available to our clients.                            
                                                                               
  "Last week I went to a legal seminar outside, and the                        
  speaker was discussing various business entities that you                    
  could offer to your client.  He indicated that the count was                 
  now with 37 states with limited liability company statutes,                  
  and he boldly predicted that by 1995 we'd have all 50 states                 
  with LLC legislation.  The California senate just passed an                  
  LLC bill expected to be on the governor's desk very                          
  shortly."  Mr. Manley went on to express concern that                        
  Alaskans would lose business to other states from                            
  individuals desiring the formation of LLCs.                                  
                                                                               
  "Our drafting committee worked from the ABA prototype act.                   
  That was put together by a national panel with the American                  
  Bar Association business law section, and basically, all the                 
  LLC acts throughout the country are substantially similar.                   
  And I think the ABA prototype distills the best of all of                    
  these various bills.  We've got a fair amount of experience                  
  with LLC.  The first was Wyoming in 1977, then Florida in                    
  1982, so we've got a certain amount of history even though                   
  this is happening relatively rapidly.                                        
                                                                               
  "To explain:  An LLC has a blend of corporate and                            
  partnership characteristics with a flexible operating                        
  system.  It meets the needs of Alaska business and provides                  
  a federal tax advantage.  And, as Mr. Durrell pointed out,                   
  it facilitates foreign investment because foreign investors,                 
  nonresident aliens, cannot be in an S corporation.  So                       
  accordingly, they are either subject to general partnership                  
  rules regarding liability or, in the alternative, subject to                 
  corporate double tax."                                                       
                                                                               
  MR. MANLEY posited a hypothetical Japanese consortium                        
  seeking a location to set up a timber mill in either Alaska,                 
  Washington or Oregon.  He described the negative response of                 
  consortium accountants to Alaska upon learning that only                     
  Oregon and Washington offered the option of an LLC, with                     
  "pure individual one-bite taxation, and limited liability."                  
  He concluded that LLC legislation was necessary from an                      
  international point of view in order to keep up with                         
  developments in the law.                                                     
                                                                               
  Turning to the subject of revenue, Mr. Manley said he did                    
  not believe LLC legislation would have "any impact on Alaska                 
  state corporate income tax, because existing C corporations                  
  are not going to dissolve because of the tax and transfer                    
  costs.  And, really, this is primarily going to replace, for                 
  the appropriate people, partnerships and S corporations that                 
  don't pay tax right now."  [Concurrent conversation in                       
  hearing room reduces testimony sound quality.].  Mr. Manley                  
  finished his testimony by opining it would be a rare                         
  situation in which someone forming a corporation who had                     
  been seriously considering a C corporation, which pays                       
  corporate income tax, would elect a limited liability                        
  company.                                                                     
                                                                               
  Number 780                                                                   
                                                                               
  CRAIG INGHAM, ALASKA BANKERS ASSOCIATION, testified via                      
  teleconference from Fairbanks in opposition to HB 420.  "I                   
  represent the Alaska Bankers Association.  I am not an                       
  attorney.  I am a business person and the Alaska Bankers                     
  Association opposes this bill.  We oppose it for some very                   
  fundamental reasons and some technical reasons as well."                     
                                                                               
  MR. INGHAM discussed the very broad spectrum of entities to                  
  be affected by the legislation, including sole                               
  proprietorships, where the risk factors in start-up are                      
  enormous.  He addressed the situation of third party vendors                 
  who must sustain considerable losses in the failure of new,                  
  and especially small and sole-proprietor, businesses; the                    
  vulnerability of these vendors provided reason, he said, for                 
  sole proprietorships and partnerships to be liable                           
  personally for the debts of their business.                                  
                                                                               
  MR. INGHAM went on to discuss management aspects of the                      
  bill.  He explained that "...in a corporation, the                           
  shareholders or owners of a corporation are prohibited, are                  
  not allowed to manage the affairs of a corporation.  They in                 
  turn have to elect directors who manage the affairs.  And                    
  the directors manage those affairs by appointing officers of                 
  the corporation to act as agent.  And they're given specific                 
  authority to corporate resolutions and so forth that carry                   
  on the business at hand for the corporation.  In a                           
  partnership or a sole proprietorship, the owner is the                       
  manager."                                                                    
                                                                               
  MR. INGHAM said, "Now, when you mix the two worlds together,                 
  you give the owner limited liability and not unlimited                       
  liability, you are allowing for the manager, basically to                    
  provide, from a management standpoint, the duties and                        
  responsibilities of carrying out the business of the entity                  
  without having to worry about any personal liability.  That                  
  could be very confusing.  Especially to other businesses                     
  that are trying to do business with this new entity.  If you                 
  look at this, just look at the first paragraph under                         
  management, Section 10.51.10 on page seven, it says, `Except                 
  as otherwise provided by this chapter, the members of a                      
  limited liability company manage the affairs and make the                    
  decisions of the company unless an operating agreement of                    
  the company names a manager for the company.  Management by                  
  members is subject to a provision in an operating agreement                  
  or this chapter limiting or increasing the management rights                 
  and duties of the members, including limits or increases                     
  placed on a class of members or individual members.'                         
                                                                               
  "So now we have this operating agreement saying who can                      
  manage the affairs of the company and what they can and                      
  cannot do.  And this is for small business, that we're                       
  talking about here, as well as big business.  If you go                      
  further through the section as it deals with management and                  
  you go over to page nine, at the top of the page, line                       
  three, under subsection (b), it says, unless otherwise                       
  provided in that operating agreement of the company, or by                   
  this chapter, if an operating agreement of a company means                   
  more than one manager for the company -- in other words, now                 
  we can have the operating agreement saying, well, instead of                 
  just one person appointed by the members, we can now have,                   
  you know, five or ten managers; the consent of more than one                 
  half of the number of managers of a limited liability                        
  company is required to decide the affairs of the company.                    
  Does that mean if I do business with one of these entities I                 
  better make sure that the manager has gone out there and                     
  gotten a majority rule on doing business with him?                           
                                                                               
  "So if we move on, here, to the section that I think is most                 
  important of all, article seven, `Relationship to Third                      
  Parties,' that's who these people will be doing business                     
  with.  Their customers and other businesses.  At the top of                  
  page 14:  `Agency Power of Members and Managers.'  It goes                   
  on to say, `Except as provided in (b) and (c) of this                        
  section, a member of a limited liability company is an agent                 
  of the company for the purpose of conducting the company's                   
  affairs.  A member that, including the execution of an                       
  instrument in the name of the company, that appears to be                    
  performed in the usual way of conducting the affairs of the                  
  company, binds the company.'  Well, does that mean now I                     
  need to know what is usual and customary as far as the                       
  affairs of the company?  I guess I'm running out of time                     
  here.                                                                        
                                                                               
  "But the big issue here is, there are a lot of big questions                 
  that have not been asked by the business community, and the                  
  people that are going to have to do business with this new                   
  entity as to how it's going to work when it comes down to                    
  relating to third party interests.  And let's not think that                 
  we're treading over something brand new here.  This was                      
  tried one hundred years ago, in what was called the Business                 
  Trust.  And the Business Trust was originated to obtain                      
  certain advantages of corporate status, such as limited                      
  liability.  It was very popular in the few years it was in                   
  existence in the 1900s.  However, a number of states ruled                   
  that the partners should be held personally liable.  The                     
  state legislature enacted laws requiring that.  I wonder why                 
  they would do that?"  [Tape ends abruptly.]                                  
                                                                               
                                                                               
  TAPE 94-49, SIDE B                                                           
  Number 000                                                                   
                                                                               
  REP. DAVIDSON asked Mr. Ingham if he had any other points.                   
                                                                               
  Number 007                                                                   
                                                                               
  MR. INGHAM:  "I do have other points, and I would like to                    
  have a few more minutes of time if I may."  Chairman Porter                  
  invited him to continue.  "I talked about the management                     
  problems here, how that could be confusing to deal with                      
  other business entities out there as far as this new                         
  business entity.  Well, let's talk about the access of a                     
  particular company, or, you know the property that company                   
  owns.  If you go now to ownership and transfer of property,                  
  which is Article 10, it basically says that the limited                      
  liability company can hold property in either the name of                    
  the company or the name of the individual member or manager.                 
  That could be extremely dangerous, for the simple reason                     
  that it enables someone to move assets around fairly easily.                 
  There certainly should be language prohibiting property                      
  being held in any other manner but the company's name.                       
  That's pretty clear.  If you have a corporate structure and                  
  you go out there and you have vehicles or real estate, it's                  
  in the name of the corporation.  It can't be in the name of                  
  the officers of the corporation or the managers.  In a                       
  partnership, sure, the assets of a partnership can be                        
  flexible, but that's because those partners are personally                   
  liable for their business actions and their business                         
  dealings.  That's a very important issue.  And when you                      
  really sit down and look at this bill, from a business                       
  standpoint, I am sure it has all the tax benefits that they                  
  say it does have.                                                            
                                                                               
  "But if you're looking to come up with a new kind of                         
  business structure, I think it's very, very critical that                    
  not only the legal profession should be brought into this                    
  equation, but the business profession be brought in as well,                 
  and that a good amount of time is spent going through these                  
  issues and coming up with some of the fire walls that you                    
  have in a corporate structure to make sure that assets can't                 
  be moved around and the lines of management are clear and                    
  concise, people doing business with this entity can feel                     
  comfortable doing business with it.  And I know we may not                   
  be the first state to adopt this sort of legislation, but                    
  I'd rather be the last state than the first state to adopt                   
  something that changes the way we've done business for the                   
  last three or four hundred years.  And I'll just leave it on                 
  that note."                                                                  
                                                                               
  Number 107                                                                   
                                                                               
  WILLIS KIRKPATRICK, DIRECTOR, DIVISION OF BANKING,                           
  SECURITIES AND CORPORATIONS, DEPARTMENT OF COMMERCE AND                      
  ECONOMIC DEVELOPMENT, testified in support of HB 420.  "I                    
  would encourage the committee to consider HB 420 and pass it                 
  out."  Describing his division, Mr. Kirkpatrick observed,                    
  "...we look at and view it as one of our goals to make                       
  Alaska one of the most easiest places in which to do                         
  business.  We feel that is a paramount responsibility of the                 
  Department of Commerce and Economic Development."                            
                                                                               
  MR. KIRKPATRICK noted that the Department of Commerce "...is                 
  a member of what we call the International Association of                    
  Corporation Commissioners.  That includes other countries                    
  besides the United States, but it primarily has to do with                   
  the old British Crown corporation type of formation.  And we                 
  became aware of limited liability companies and the Wyoming                  
  experience.  And so we had been looking at it and how it                     
  might be beneficial to the state of Alaska, especially with                  
  some of the activity that we've been trying to do in the Far                 
  East and eastern Russia."                                                    
                                                                               
  MR. KIRKPATRICK continued, "In early 1992 we were approached                 
  by members of the Alaska Association of Certified Public                     
  Accountants to encourage us to consider drafting a limited                   
  liability company law.  We got a hold of those states that                   
  did have those provisions and tried to seek out what                         
  problems they had.  There was a little bit of confusion                      
  because of the IRS ruling as to what is a corporation type                   
  of organization or a partnership type of an organization.                    
  We then took a look at the state of Wyoming, which is what                   
  is called a bullet-proof state, because they were the only                   
  state at that time that had an IRS ruling, so most of the                    
  states early on then following Wyoming's law which meant                     
  that if you had the characteristics of the Wyoming law, then                 
  you were assured a proper ruling from the IRS, relying upon                  
  Wyoming's ruling.                                                            
                                                                               
  "We then were approached by members of the Alaska Bar                        
  Association and we told them of our efforts and they                         
  indicated that they were interested in working on such                       
  legislation, so we sent them our draft.  What has resulted                   
  from their effort is a little different from our draft - not                 
  substantially - but they included in their draft language of                 
  our draft that had to do with the administration of the Act.                 
  So, what has been, as a Sponsor Substitute, includes those                   
  items of administration ability that we had in exercising                    
  this type of law."                                                           
                                                                               
  Noting that he himself was not a lawyer, Mr. Kirkpatrick                     
  went on to describe the extensive history of the origins of                  
  the legislation at hand.  Mr. Kirkpatrick discussed the                      
  origins of the Alaska Corporation Code and the evolution of                  
  corporation law in Alaska and acknowledge a need to                          
  recognize the risks of doing business.                                       
                                                                               
  Number 249                                                                   
                                                                               
  REP. DAVIDSON:   "Mr. Kirkpatrick, you heard Mr. Ingham's                    
  comments and concerns.  Could you take say one or two or                     
  three of those concerns and give us your perspective as far                  
  as - you seem to be very much for the bill and don't see any                 
  downsides.  Mr. Ingham, of course, who is a banker, saw                      
  considerable downsides.  I was wondering if you could give                   
  us return fire."                                                             
                                                                               
  Number 266                                                                   
                                                                               
  MR. KIRKPATRICK responded, "I think Mr. Ingham has some very                 
  good points."  He compared the process of drafting the                       
  legislation at hand with protracted formulation of the                       
  controversial Alaska Corporation Code and noted there would                  
  always be room for debate in determining the nature of                       
  proposed business structures.  "Maybe," Mr. Kirkpatrick                      
  suggested, "there should be somebody else taking those                       
  points [to] debate them on the other side.... I don't have                   
  any problem at all with some of the suggestions that he                      
  makes in tightening up property ownership...."                               
                                                                               
  MR. KIRKPATRICK recommended that some issues raised in HB
  420 requiring further discussion be considered at a later                    
  date in amendments.  He stated that he did not feel that in                  
  a business organization law the law could be structured to                   
  protect creditors and went on to describe the criteria                       
  courts could use in evaluating the responsibilities of                       
  debtors.  Mr. Kirkpatrick concluded by reiterating that he                   
  did not see how one could structure a corporate organization                 
  that would protect creditors from risk, but that he did                      
  understand and appreciate Mr. Ingham's concerns.                             
                                                                               
  Number 350                                                                   
                                                                               
  REP. THERRIAULT:  "I am certainly willing to consider any                    
  proposed changes to the bill.  I know there have been                        
  negotiations and discussions going on between the regulator,                 
  the regulatees, the people that want to be involved in                       
  forming these new business ventures.  I think one thing                      
  that's important to point out, the previous speaker just                     
  brought up, that creditors can require personal assurances,                  
  just like they can with corporations.  I was involved in a                   
  business.  We wanted to get a bank loan, and they required                   
  personal guarantees.  They can do that, they do that right                   
  now with corporations because of the limited liability, and                  
  some concern, and being risk adverse.  They can do that same                 
  thing with limited liability.  So we're not forming a new                    
  structure that has any more of an ability to leave creditors                 
  hanging out there than existing business structures.  I                      
  understand that Mr. Ingham represents a trade group that is                  
  severely risk averse.  I think they have means at their                      
  disposal to protect themselves."                                             
                                                                               
  MR. INGHAM asked if he might respond to that; Chairman                       
  Porter first recognized Rep. Davidson's question.                            
                                                                               
  Number 378                                                                   
                                                                               
  REP. DAVIDSON posed a question concerning the possibility of                 
  providing some protections under law for smaller business                    
  entities to mitigate the risk of new business organizations.                 
                                                                               
  Number 395                                                                   
                                                                               
  CHAIRMAN PORTER, acknowledging the extensive information and                 
  analysis yet to be prepared before the bill could be                         
  properly evaluated, referred HB 420 to a subcommittee to be                  
  chaired by Rep. James and to include Representatives Kott                    
  and Davidson.  He noted, moreover, that while in general he                  
  was supportive of the legislation, he wished to know the                     
  effects of removing extant limitations of businesses -                       
  limitations for which reasons existed-before seeing them                     
  eliminated.                                                                  
                                                                               
  Number 425                                                                   
                                                                               
  REP. DAVIDSON:  "Mr. Chairman, thank you.  In view of what                   
  you've just said, it seems to me that we are a different                     
  kind of state.  We are a resource rich state.  And one of                    
  the problems we see, and it's not always a problem, but we                   
  have a tremendous amount of foreign investor ownership in                    
  our state, already.  For comparative purposes, it seems                      
  we're more like a third world country in terms of business                   
  practices, than part of more up to date modern societies or                  
  states, but that is a concern that I have.  And I was                        
  wondering, you know, if in fact a bill like this is going to                 
  encourage additional foreign ownership of our resources.                     
  Where does that leave us protection to ensure that our                       
  children and their grandchildren are going to be in a                        
  position to control the picture up here?  And that's one of                  
  my main concerns."                                                           
                                                                               
  CHAIRMAN PORTER responded that he would refer this inquiry                   
  to the subcommittee and suggest to them that they consult                    
  with Mr. Ingham and Mr. Manley on this and other aspects of                  
  HB 420.  This was acceptable to the committee.                               

Document Name Date/Time Subjects