Sponsor Statement for HB 266

The Limited Partnership and Limited Liability Company Simplification Act

This bill responds to a recent change in federal tax law which affects partnerships and limited liability companies. On January 1, 1997 the "check the box" entity classification regulations issued by the IRS became final. This change in federal law simplifies the formation and operation of partnerships and limited liability companies.

The check-the-box regulations will make it easier for business entities to be taxed as partnerships for federal income tax purposes. Under old law if a business entity had two or fewer of four corporate characteristics, it was taxed as a partnership. If it had more than two corporate characteristics, it was taxed as a corporation. In most instances the profits of a corporation are taxed twice. On the other hand, income is taxed to the partners of a partnership only once. Under the check-the-box regulations a business entity can have all four corporate characteristics and it will still be taxed as a partnership unless the partners "check-the-box" and elect to be taxed as a corporation.

Alaska's Uniform Limited Liability Aact and Limited Partnership Act were drafted with this four corporate characteristics test in mind to make sure that by default Alaska limited liability companies and limited partnerships would be taxed as partnerships under federal law. Most of the complexity required by this four corporate characteristic test can be deleted from Alaskan law. Alaska has the opportunity to be the first state to amend its limited liability company and limited partnership law to conform to the new check-the-box regulations. If this bill is enacted it is anticipated that business men and women from outside will choose to form their limited liability companies and limited partnerships in Alaska.

This bill will simplify our law, will reduce the legal fees for those who decide to form limited liability companies and limited partnerships, and should result in increased revenue to the state.