Legislature(2003 - 2004)
05/03/2004 04:30 PM L&C
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
SB 389-CORP. CONVERSION TO LIMITED LIABILITY CO. CHAIR ANDERSON announced that the next order of business would be SENATE BILL NO. 389, "An Act relating to the conversion of certain corporations to limited liability companies; and providing for an effective date." Number 1978 JANE ALBERTS, Staff to Senator Con Bunde, Alaska State Legislature, presented SB 389 as committee aide to the Senate Labor and Commerce Committee, sponsor of the bill. She explained that the bill was introduced at the request of several Alaska Native Corporations (ANCs). Number 2005 MARK HICKEY, Lobbyist, Aleut Enterprise Corporation, explained that the bill is a housekeeping measure and that a number of the ANCs support it. He said it makes one change. Current law allows a number of business entities to convert from their status as a business entity to that of a limited liability company. Current law does not include corporations in that list, and the bill would allow a corporation that is a subsidiary to be converted, which ensures no tax loss to the state, he related. He stated that there is a zero fiscal note from the Department of Revenue. The change could be done without this bill, but it would be much more cumbersome, he said. He pointed out that there are letters of support in the members' packets. REPRESENTATIVE ROKEBERG asked if Title 10 is applicable to all corporations or just to ANCs. MR. HICKEY said, "All corporations." He noted that it is especially applicable to regional corporations, but the change is applicable to any corporation in the state that is a subsidiary. REPRESENTATIVE ROKEBERG asked if there is a witness from the Department of Revenue. Number 2145 CHUCK HARLAMERT, Juneau Section Chief, Tax Division of Administrative Services, Department of Revenue, introduced himself. REPRESENTATIVE ROKEBERG asked if a C-type corporation is currently able to make a conversion to a limited liability company (LLC). MR. HARLAMERT replied that a business could certainly reorganize and become an LLC, but state law does not allow it to change its status from a corporation to an LLC. REPRESENTATIVE ROKEBERG asked if that is what the bill does. MR. HARLAMERT replied that from his understanding, it does. REPRESENTATIVE ROKEBERG asked how it happens. MR. HARLAMERT said he assumes that the company hires an attorney to file [the new status] with the Department of Commerce. Number 2208 MR. HICKEY referred to page 1, lines 9-13, [of SB 389] and pointed out that that is existing law, which is the list in Title 10 that allows for a conversion to a LLC. Adding in the change on the top of page 2 would allow corporations that are a subsidiary to have the authority to convert to a LLC, he explained. The Department of Law and The Department of Economic and Community Development helped to draft this change, he said. REPRESENTATIVE ROKEBERG asked if it is [subsection] (j) or [subsection] (l). MR. HICKEY said [subsection] (j). REPRESENTATIVE ROKEBERG said it is only for subsidiaries and is not a "free pass" for C-corporations to make a direct conversion. CHAIR ANDERSON said that in the [Tax Division] fiscal note it says: Pursuant to federal income tax law, a limited liability company ("LLC") is an entity that is not automatically classified as a corporation. The default classification of a multimember business entity organized as an LLC is a partnership and the default classification of a single member business entity organized as an LLC is a disregarded entity where the owner is the taxpayer. The LLC may instead, however, elect to be taxed as a corporation in lieu of a default classification. REPRESENTATIVE ROKEBERG stated that public policy is to not allow for a very quick conversion from a C-corporation to an LLC for tax reasons. CHAIR ANDERSON said that is why he read the fiscal note into the record. He continued to read, "An LLC taxable as a corporation for federal income tax purposes is subject to the Alaska Corporation Net Income Tax in the same manner as any other corporation." He asked how the fear of changing status for tax reasons might be quelled. Number 2302 MR. HICKEY said the question also came up on the other side. "The tax consequence at the state level is zero. We pay - in our case we're consolidated with the parent - we pay at the parent ... level which has the obligation for corporate income tax based on earnings," he said. The desire to become an LLC is not a tax issue, but is because it is cheaper to operate and a full board will not be required. "It's also a governance issue - the SBA (Small Business Association) rules required a fair amount of arm's length arrangement with the subsidiary board so we could not, in the past, have members from our parent board sit on the board of subsidiaries," he explained. "This will give us tighter control," he said. TAPE 04-50, SIDE B Number 2327 MR. HICKEY continued to say that the bill was designed so that there is no state tax consequence, which would not have been the case if the bill had been broadened to just "corporations". REPRESENTATIVE ROKEBERG said he assumes one reason Mr. Hickey would like to make this change is if he has joint venture operations then it would be easier to form under an LLC. He asked if that is correct. MR. HICKEY replied, "Well, we want to protect the ability to do joint venture and that's why it's by one or more parent corps. But the tax consequence with that case will, based on your level of ownership, will accrue with each corporation, so we have 80 percent ownership, we'll have 80 percent." REPRESENTATIVE ROKEBERG said the point he was getting to is, "You're actually not going to really be doing that as a tax avoidance method for Alaska corporate taxes because ultimately you'd have to return your net profits back to the parent corporation at which time there'd be a tax ...." He asked if that is correct. Number 2288 MR. HARLAMERT replied that the LLC is a non-entity for tax purposes. It's either going to be treated as a partnership or the income goes to the owners as it's earned and it's taxed as it's earned. REPRESENTATIVE ROKEBERG asked if a class C-corporation could be an owner of an LLC. MR. HARLAMERT replied absolutely. They could still elect tax treatment of that LLC as a partnership where they pay the tax on the income as it's earned, or to treat it as a corporation. Generally, it would be consolidated, and the same result, he added. Number 2250 REPRESENTATIVE LYNN moved to report SB 389, Version 23-LS1923\D, out of committee with individual recommendations and the accompanying fiscal notes. There being no objection, SB 389 was reported from the House Labor and Commerce Standing Committee.