Legislature(1993 - 1994)

03/08/1994 03:00 PM L&C

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
  Number 001                                                                   
  CHAIRMAN HUDSON convened the meeting at 3:20 p.m. and                        
  invited Rep. Therriault to present HB 420.                                   
  Number 049                                                                   
  REP. THERRIAULT read the following sponsor statement into                    
  the record:                                                                  
  The limited liability company is a relatively new, hybrid                    
  form of business structure 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 LLC's.  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.  LLC's avoid this                     
  double taxation by allowing earnings to flow through to                      
  individual owners in the same manner partnerships 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 LLC's                  
  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.  LLC's 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 Ruling 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 LLC's burgeoned, with two states adopting LLC acts in                     
  1990, four in 1991, 10 in 1992 and more than 20 states                       
  introducing measures in 1993.                                                
  LLC's have tended to be family businesses, professional                      
  service firms venture capital companies, real estate                         
  businesses and startups.  I believe the LLC will provide                     
  these business owners with an efficient and flexible                         
  investment vehicle that allows both limited liability, and                   
  federal incomes 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, and am more than willing to                        
  discuss proposed changes.                                                    
  Number 200                                                                   
  MR. CHARLES SCHUETZE, attorney, testified in favor of HB
  Number 250                                                                   
  MR. BRIAN DURRELL, attorney, testified in support of HB 420.                 
  Number 384                                                                   
  MR. ROD LIND, CPA, testified in support of HB 420.                           
  Number 405                                                                   
  MR. BOB MANLY, attorney, testified in support of HB 420.                     
  Mr. Manly stated that he had briefly reviewed the sectional                  
  analysis and it appeared in order.  He outlined the sections                 
  as follows:                                                                  
  Article 1 - provides that limited liability companies can be                 
  organized for any lawful purpose provided they comply with                   
  any other laws governing the activities they are under.                      
  Article 2 - limited liability companies must use the words                   
  "limited liability company" within the name in order to make                 
  sure they can be distinguished from any other entity.                        
  Article 3 - deals with how you set up a limited liability                    
  Article 4 - provides mechanisms for amending the articles.                   
  Article 5 - proposes a number of default provisions, this                    
  allows for flexibility within the company.                                   
  Article 6 - allows the admittance of new members following                   
  certain procedures.                                                          
  Article 7 - deals with agency powers.                                        
  Article 8 - covers the contribution of property, money or                    
  services to a limited liability company.                                     
  Article 9 - default mechanism to cover distribution of money                 
  to investors if partners don't already have an agreement on                  
  Article 10 - indicates how to take title to property.                        
  Article 11 - allows for dissolution and winding up the                       
  Article 12 - provides mechanism for two LLC's to merge.                      
  Article 13 - provides for regulation of foreign LLC's.                       
  Article 14 - right of LLC's to sue.                                          
  Articles 15 and 16 contain miscellaneous provisions.                         
  Number 570                                                                   
  CHAIRMAN HUDSON asked Mr. Manly what, if any, were the                       
  elements in this bill that would protect the public.                         
  Number 585                                                                   
  MR. MANLY stated the public would be protected in that when                  
  a business is doing well everyone is happy and everyone gets                 
  paid on time, etc.; but if a business goes under, the                        
  economic failure affects everyone.                                           
  Number 619                                                                   
  CHAIRMAN HUDSON asked if this type of new legislation was                    
  predicated upon compliance with federal law.                                 
  Number 627                                                                   
  MR. MANLY answered that to a certain extent the federal tax                  
  code was an influence.                                                       
  TAPE 94-20, SIDE B                                                           
  Number 001                                                                   
  CHAIRMAN HUDSON stated that it sounded like a limited                        
  liability corporation was the same as a limited liability                    
  Number 020                                                                   
  MR. MANLY answered that a limited liability partnership was                  
  a separate entity.                                                           
  Number 027                                                                   
  MR. LIND stated that a limited liability partnership is a                    
  general partnership that has one difference, it protects the                 
  innocent partners from the tort of another partner.                          
  Number 058                                                                   
  MS. JO KUCHLE, attorney, testified in support of HB 420.                     
  Ms. Kuchle stated she has often had clients from out of                      
  Alaska wishing to invest in an Alaskan business venture but                  
  are unable to do that and get limited liability in a                         
  corporation form.                                                            
  MS. KUCHLE added that in her opinion HB 420 would be a good                  
  vehicle to help businesses gain favorable federal tax                        
  Number 120                                                                   
  CHAIRMAN HUDSON asked whether or not when forming a limited                  
  liability company a group would have to disclose background                  
  that would include bankruptcy or enforcement actions, etc.                   
  Number 160                                                                   
  MS. KUCHLE stated that when you form a corporation under                     
  present law you are not required to disclose anything.                       
  Number 199                                                                   
  REP. MULDER asked how difficult it would be to reorganize a                  
  "C" corporation into a LLC.                                                  
  Number 205                                                                   
  MR. MANLY suggested that there would be very few of those                    
  types of reorganizations due to significant adverse tax                      
  REP. MULDER stated that he didn't understand all the                         
  specifics of HB 420, but felt it was a good move towards                     
  promoting economic development.                                              
  Number 237                                                                   
  CHAIRMAN HUDSON stated he was trying to figure out the                       
  relationship between the formation of and LLC and the IRS.                   
  Rep. Hudson asked if LLC's be subject to the IRS review and                  
  compliance in accordance with the federal tax laws.                          
  Number 258                                                                   
  MR. MANLY stated that once HB 420 passed at least one                        
  committee they were going to submit the bill and two                         
  hypothetical situations to the IRS for a revenue ruling for                  
  tax purposes.                                                                
  REP. MULDER moved to adopt the sponsor substitute for HB
  420. No objections were heard; it was so ordered.                            
  REP. MULDER moved SSHB 420(L&C) with a zero fiscal note and                  
  individual recommendations.                                                  
  CHAIRMAN HUDSON adjourned the meeting at 4:27 p.m.                           

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