Texas Pioneers "Partnership Banks." (Limited Banking Associations Taxed like Partnerships and Subchapter S Companies)

Article excerpt

It looks like a bank. It acts like a bank. And to borrow from former Citicorp chief Walter Wriston's observation about Merrill Lynch, it even "quacks like a bank." In fact, it is a bank.

But it's also something more. It is a "limited banking association"--a new corporate creature that can now be chartered in Texas, and that is taxed like a partnership, rather than as a corporation.

Best of both worlds

Last June, Texas banking law was changed to permit formation of or conversion to these quasi partnerships. The concept was patterned after limited liability companies, a form of business organization pioneered in Wyoming that has spread to about 34 other states.

Typically, of course, corporate earnings are subject to double taxation: First, the corporation itself pays taxes on its earnings; second, the corporation's shareholders pay taxes on any dividends.

By contrast, earnings of partnerships and Subchapter S companies are taxed only once. Under IRS rulings, limited liability corporations-which provide owners with a corporate-style shield against liability--qualify for partnership tax treatment.

Banks can't be constituted as partnerships or S corporations, explains Kenton McDonald, an attorney with Matthews & Branscomb, Corpus Christi, Texas. However, using the Wyoming limited liability corporation statute as a guideline, McDonald worked with Texas state bankers associations to obtain legislation permitting a banking version of this form of organization.

After several unsuccessful attempts, the limited banking association legislation passed.

Mostly transparent

To the public, a limited banking association would look like any other commercial bank, with the exception of "LBA" or "Limited Banking Association" following its name. Structurally, the bank would operate much the same too, with some changes in terminology. Instead of being called shareholders, owners would be called "participants." The board of directors would be called the "hoard of managers."

For the most part, "it's just semantics," says Al Jones, president and CEO of $200 million-assets American National Bank, Corpus Christi, which is readying an application. Jones says American National has about 100 shareholders.

Transfers of an individual's ownership in an LBA are a bit trickier than simply selling stock of an ordinary bank. …