Legislature(1993 - 1994)
03/08/1994 03:00 PM L&C
* first hearing in first committee of referral
= bill was previously heard/scheduled
= 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 420. 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 company. 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 process. Article 10 - indicates how to take title to property. Article 11 - allows for dissolution and winding up the corporation. 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 partnership. 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 attributes. 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 consequences. 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.