HB 296-UNIFORM PARTNERSHIP ACT MR. PAT HARMAN, legislative aide to Representative Pete Kott, explained that HB 296 is a House Judiciary Committee bill that will enact the Uniform Partnership Act in Alaska. The basis of Alaska statutes regarding the Uniform Partnership Act go back to 1914; HB 296 brings that version up to date. HB 296 incorporates the concept of the entity of a partnership, not the aggregate of the individuals who are in the partnership. A business operating under a partnership is a default classification; if a business does not fall under another classification it will default to a partnership. Many businesses are operating in Alaska today as partnerships and do not know it. Number 47 MR. ARTHUR PETERSEN, Uniform Law Commissioner, noted that the National Conference of Commissioners on State Laws, the creators of the original Uniform Partnership Act, is currently in its 109th year of existence. The old partnership act was enacted in all states except Louisiana. In the United States, partnership law is the law of the Uniform Partnership Act and the case law interpreting it. HB 296 updates the 1914 version which Alaska enacted in 1917. HB 296 includes the 1994 revision and the 1996 amendments (liability partnership provisions), and one amendment made in 1997 that responds to a federal tax ruling. MR. PETERSEN said HB 296 will put into statute the entity concept of a partnership act. Current law is a confusing blend of the aggregate of individuals concept and the entity concept. The new version makes clear it is the entity concept that has ramifications throughout the Act. It makes the law much simpler, cleaner and conforms with what most people think of as a partnership. MR. PETERSEN stated HB 296 passed unanimously in the House and is supported by the Department of Community and Economic Development (DCED). DCED's concern about changing the annual reporting requirement to a biennial one has been taken care of in CSHB 296 (L&C). The Attorney General's office supports HB 296, as does the business law section of the Alaska Bar Association. Number 116 SENATOR HALFORD asked how limited liability of a partnership works. MR. PETERSEN asked to defer to Mr. John McCabe for an expert professional opinion but he answered that a partnership is a default concept that regulates what happens when a group of people get together and form a business activity. The group can then register in a civil act of registration to accomplish the limited liability aspect and thus become a limited liability partnership. Procedurally, that action requires registering with DCED. SENATOR HALFORD said two people who want to go into business together, each owning 50 percent as operator/owner, have the choice of forming as a partnership or a corporation. He asked if general partners had the option of limited liability in the past. MR. PETERSEN answered that general partners did not have limited liability. SENATOR HALFORD asked if it is easier to maintain the shield of limited liability in a limited liability partnership than it is in a small corporation. Number 146 MR. PETERSEN answered yes, and a limited liability partnership is also simpler to form than a corporation. MR. JOHN MCCABE, Legislative Director for the Uniform Law Commissioners, explained that a general partnership under current law and the new version of the Uniform Act is an entity in which every partner will have joint and several liability with respect to the partnership business. Partners are co-equal with regard to their ability to manage the business and they are co-equal in regard to the liability for the business. A creditor for a partnership has the ability to charge the assets of any partner in order to satisfy the liabilities of the partnership. Under HB 296 there will be several liabilities so that partners will be able to gain co-satisfaction from their fellow partners unless the partnership puts itself in a position to be a limited liability partnership. Existing statute has limited liability partnership provisions but HB 296 is a somewhat simpler system. Alaska has regarded limitation of liability as an artifact of registering something in the public record so that third parties dealing with the entity will be able to find out easily whether there is limitation of liability or not. Under the new Uniform Act (the 1997 version) a partner will register a statement into public record in the same way as a limited partnership, limited liability company, or a corporation. Filing is a public announcement that all of the partners have limitation of liability. The limitation is in terms of vicarious liability with respect to a partnership. Vicarious liability means that liabilities are created by other members of the partnership. The Uniform Act is a full shield liability statute that provides every partner with insulation from liability with respect to his personal assets for any obligation of the partnership, except those in which the partner has personally engaged liability. Once a partnership is established, it has to use the term "limited liability partnership," the initials "LLP," or signify that it is a limited liability partnership. In this way, third parties will know about the limitation of liability and the full shield limitation of liability will go forward. This remains as long as the partnership is a functioning partnership. Partnerships are more easily terminated and are not perpetual like corporations are. Until a termination of the LLP status is achieved administratively, perhaps because the partnership did not file its appropriate reports to sustain itself as an LLP, it maintains its limited liability. The LLP provisions are there for partnerships that exist: an existing partnership must establish itself as having the quality of limitation of liability. The LLP provisions in partnership law are there to serve the stability of the partnership in order to give the partners limited liability stature. In order to obtain limitation of liability, without a limited liability partnership provision, the partnership will have to be dissolved and recreated in the form of another entity. This can be eliminated with a limited liability provision in the statute. Number 248 CHAIRMAN TAYLOR asked if a limited partnership creates a more efficient shield from liability than a small wholly-owned corporation. MR. MCCABE said that under the Uniform Act there is full shield liability for a partnership so that the shield of a small corporation is mimicked more closely. Personal liability remains; it is vicarious liability that is a product of the shield. Every partner is liable for his own acts. This differs from corporations in which most shareholders have full liability but they do not participate in the business and, therefore, they are not able to establish personal liability. Partnerships are designed to be ongoing businesses in which every partner is a participant in the business. Number 291 CHAIRMAN TAYLOR said that Section 32.06.305 through Section 32.06.308 provides that a person who is a limited partner and not actively participating will not lose any more assets than those who invested in the partnership. MR. MCCABE agreed, but said HB 296 deals with an entity called a limited liability partnership which is the old general partnership in which the partners have full joint liability, except HB 296 adds limitation liability. That will absolve a partner from vicarious liability. He noted that passive investors are limited partners with full liability for everything. CHAIRMAN TAYLOR asked if an LLP will be liable up to a certain amount, after which the partners with provable liability will be responsible. MR. MCCABE answered yes. CHAIRMAN TAYLOR said when Alaska passed the tort reform legislation the distinction was removed from joint and several liability. Throughout HB 296, joint and several liability is found among partners. He asked how this differs from the tort reform legislation. Number 367 MR. MCCABE said tort law refers to a group of people who have contributed to the harm. Partnership law is a business entity composed of individuals who join together as partners to do business. SENATOR DONLEY moved HB 296 from committee with individual recommendations. With no objection, the motion carried.