Legislature(1995 - 1996)

04/10/1996 01:12 PM JUD

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
 HB 549 - LIMITED LIABILITY PARTNERSHIPS                                     
 Number 185                                                                    
 BILL EZZELL, CPA, Deloitte & Touche, LLP, testified by telephone              
 from Washington, D.C.  He currently chairs a coalition of the six             
 largest accounting firms in the United States called the                      
 Accountants Coalition.  This group formed to promote among other              
 things, the Limited Liability Partnership laws for the accounting             
 profession, as well as, other professional firms both large and               
 small.  Mr. Ezzell made reference to Mike Duffey, who was with him            
 in Washington, and Mr. Duffey is an attorney with the accounting              
 firm of Ernst & Young, LLP and has been very involved in the                  
 passage of Limited Liability Partnership (LLP) legislation around             
 the nation.                                                                   
 MR. EZZELL continued to address the Limited Liability Partnership             
 legislation before the Judiciary Committee.  The form of                      
 organization a business will operate in is one of the most                    
 important decisions that any business owner makes at the beginning            
 or during the course of business.  Several years ago many states              
 began exploring opportunities for new and existing businesses to              
 afford themselves ways to limit the personal liability of their               
 owners by using new forms of organization.  Alaska participated in            
 this process by adopting the Limited Liability Company as a form of           
 an organization previously.                                                   
 MR. EZZELL added that subsequent to the adoption of Limited                   
 Liability Companies many states have looked at and adopted Limited            
 Liability Partnership forms for business to operate under.  The               
 Limited Liability Partnership form can be a lower cost alternative            
 to a Limited Liability Company (LLC) or corporate forms of                    
 organization.  It has been viewed as a very business friendly, low            
 cost form for professional firms in particular to take advantage              
 of.  The proposed Alaska LLT law, HB 549 in it's current draft is             
 very consistent with the LLP laws which have been passed now by 40            
 states, plus the District of Columbia and Guam.  The remaining ten            
 states like Alaska has this legislation currently under                       
 MR. EZZELL stated that about the LLP itself, LLP is in fact a form            
 of general partnership, but a form which provides certain liability           
 protection to it's partners or owners.  Under a general partnership           
 all partners are jointly and severally liable for the obligations             
 of the partnership to the extent of each partner's personal assets,           
 such as houses, cars and savings accounts are available to satisfy            
 claims of a general partnership.  Under a Limited Liability                   
 Partnership, partners remain personally liable for their own acts             
 and the acts of persons they directly supervise.  The partnership             
 remains liable for it's obligations to the full extent of it's                
 assets and the capitol of the various partners.  The difference is            
 that partners in an LLP would not be personally liable for the                
 obligations of the LLP arising out of errors, omissions,                      
 negligence, incompetence or malfeasance committed by another                  
 partner or a representative of a partnership.                                 
 MR. EZZELL added further that one partner not having been involved            
 at all in a matter which brought a claim against the partnership              
 and should that claim be so large as to cause the bankruptcy of the           
 partnership, the partner who was personally involved would still be           
 personally liable, but other partners not personally involved would           
 not have their personal assets at risk in this form of                        
 organization.  There are other forms of organization already                  
 adopted by Alaska and other states that provide greater protection            
 for the personal assets of a business owner and more comprehensive            
 in covering actions beyond just liability claims for negligence,              
 errors and omissions mentioned previously, but also covering                  
 contractual obligations of the entity itself.  The LLP therefore              
 provides a little bit less protection than some of these other                
 forms and less protection than the LLC form of organization.                  
 MR. EZZELL offered that for professional services firms wishing to            
 practice in a more traditional partnership concept this is a good             
 marriage of the two issues of liability protection and the                    
 partnership concept of operating.  In the LLC form of organization            
 all of the owner's personal assets would be protected from any                
 claims arising out of claims against the company itself.  An owner            
 would only be exposed to the extent of their investment in the LLC.           
 This would be true for claims arising out of tort or claims which             
 are contractual in nature against the LLC.  The LLP would cover               
 claims only against the personal assets of partners not directly              
 involved.  The LLC is a little more like a corporation and                    
 therefore in terms in cost of compliance and cost of set up it's a            
 little more costly and complex to maintain and comply with the                
 various requirements of an LLC as versus an LLP.                              
 MR. EZZELL stated additionally and particularly of interest to his            
 firm and other large firms in regards to numbers of partners, an              
 LLC maybe deemed to be in effect a public company if there are more           
 than 500 partners.  Therefore, an LLC with 500 hundred or more                
 partners or owners would have to file and become a public registry            
 company with the Securities and Exchange Commission and would also            
 have to deal with the requirements of state securities regulators             
 and regulation.  Again, this would be a much more complex form of             
 operation and it's for this reason that firms have looked to the              
 LLP as an opportunity to provide a means to protect the personal              
 assets only of the partners not involved in the action giving rise            
 to the liability, but also to be able to do so in a low cost,                 
 efficient manner.                                                             
 MR. EZZELL noted that what they have found with other state's that            
 have passed LLP legislation is that many small and start up firms             
 have utilized the LLP as a very low cost means to organize and                
 start new businesses and hopefully bring new jobs into these                  
 businesses.  Many professional services firms far beyond an                   
 accounting firms, such as law firms, engineering, architectural               
 firms have found the LLT form of organization a very appealing form           
 to begin or to organize an existing business with.                            
 Number 779                                                                    
 CHAIRMAN PORTER asked about the relationship of an LLP which has              
 been founded in another state, but is doing business in Alaska                
 which does not yet have this form of organization.                            
 MR. EZZELL said that his organization as an LLP is able to practice           
 under the laws of Alaska, being domiciled in Delaware.  It's                  
 important in today's litigation environment for people when they              
 bring a lawsuit that there be consistency among the laws of the               
 various states.  An entity that practices such as his firm does in            
 a multitude of states can do so under some sense of consistent                
 application of the law in each of these states.  This removes any             
 uncertainty if there was a lawsuit brought which could bring                  
 substantial liability to a firm beyond the assets and capabilities            
 of a firm through it's insurance and equity.  The personal assets             
 of partners located in Alaska would be afforded the same                      
 protections as the personal assets of partners located in Delaware,           
 New York or any other place in the United States.                             
 Number 975                                                                    
 REPRESENTATIVE CYNTHIA TOOHEY asked if this legislation goes into             
 law would partnerships on the books now be required to change.                
 MR. EZZELL responded that it was a simple matter should a general             
 partnership desire to become a Limited Liability Partnership under            
 the Alaska law.  This company would merely register with the                  
 appropriate registering body through a simple form and typically              
 there is a filing fee.  This does not require extraordinary costs             
 or process to switch.                                                         
 Number 1050                                                                   
 REPRESENTATIVE CON BUNDE referred to the issue of a company having            
 more than 500 partners in the LLP arrangements and the possibility            
 that they would have to go public.                                            
 MR. EZZELL said that this issue was subject to some debate because            
 the ownership interest in an LLC is the same as stock ownership in            
 a corporation.  This has not been decided yet, it's something being           
 looked at in a number of states.  For his particular firm with 1500           
 partners they would prefer not to be a corporation.                           
 REPRESENTATIVE BUNDE clarified that this ramification existed for             
 the LLC, but not for the LLP.                                                 
 MR. EZZELL said that this was correct.                                        
 Number 1170                                                                   
 JOE SCHIERHORN, Vice President, Commercial Lending, North Rim Bank            
 and President of the Alaska Bankers Association testified by                  
 telephone.  He stated that he has worked over the last several                
 years with the accounting industry representatives in Alaska as the           
 representative for the bankers on this issue.  They've worked very            
 diligently and come to a good compromise between the two parties on           
 this legislation.  It represents a good form of doing business for            
 the accountants and provides them with flexibility and insulates              
 them from some liability which would allow them to further increase           
 their practice and do business across state lines in the way they             
 wish.  From the bankers perspective, they are comfortable with the            
 various insurance provisions, financial standards and all in all he           
 thought it was a good bill which provides for adequate liability              
 provisions for people using the services of accountants, as well              
 as, providing them with flexibility to do their business in Alaska.           
 REPRESENTATIVE BUNDE noted that accountants were mentioned in                 
 relation to this bill and asked if Mr. Schierhorn saw other                   
 applications for this LLP option.                                             
 Number 1299                                                                   
 MR. SCHIERHORN stated that this was certainly possible.  It's not             
 limited to accountants at all.  The accountants have been the ones            
 most prominent in using this type of business organization around             
 the country.  They and law firms are probably some of the largest             
 partnership organizations throughout the United States.  It's                 
 certainly open to other professions though.                                   
 CHAIRMAN PORTER mentioned that because the Judiciary Committee                
 dealt with the LLC legislation last year they are probably more up            
 to speed on this LLP legislation.  He had reviewed this legislation           
 beforehand and thought that there were no great concerns with it.             
 He noted that the Commerce and Economic Development Department                
 participant, Mike Monagle and the Society for CPAs, George Ellgee             
 were in attendance to answer questions.                                       
 Number 1426                                                                   
 REPRESENTATIVE BUNDE made a motion to move HB 549 from the House              
 Judiciary Committee with individual recommendations and attached              
 fiscal note.  There being no objection, it was so moved.                      

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