Legislature(1995 - 1996)
04/10/1996 01:12 PM JUD
* first hearing in first committee of referral
= bill was previously heard/scheduled
= 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 consideration. 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.