BILL ANALYSIS                                                                                                                                                                                                    







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          |Hearing Date:April 13, 2009    |Bill No:SB                       |
          |                               |392                              |
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               SENATE COMMITTEE ON BUSINESS, PROFESSIONS AND ECONOMIC  
                                     DEVELOPMENT
                        Senator Gloria Negrete McLeod, Chair

                         Bill No:        SB 392Author:Florez
                   As Introduced:     February 26, 2009 Fiscal:Yes

          
          SUBJECT:   Contractors:  limited liability companies.
          
          SUMMARY:  Authorizes the issuance of a contractor's license  
          to a limited liability company (LLC); mirrors the  
          provisions regulating contractor's licenses issued to a  
          corporation and applies them to contractor's licenses  
          issued to LLCs; requires an LLC to carry $1,000,000 in  
          liability insurance or $500,000 in a trust or escrow  
          account; makes technical and conforming changes.

          Existing law:

          1)Provides for the licensure and regulation of more than 250,000  
            contractors under the Contractors State License Law  
            (Contractors Law) by the Contractors State License Board  
            (CSLB) within the Department of Consumer Affairs (DCA).

          2)Defines "person" for the purpose of the Contractors Law  
            to include an individual, firm, partnership, corporation,  
            association, or other organization, and prohibits any  
            person from engaging in the business or acting in the  
            capacity of a contractor without a license.

          3)Authorizes the issuance of contractor licenses to individual  
            owners, co-partnerships, corporations and joint ventures, and  
            requires applicants for licensure to show a specified degree  
            of knowledge and experience, and prescribes qualifications for  
            the license.  The applicant shall meet the experience and  
            knowledge qualifications, in one of the following ways:

             a)   If an individual, that individual or a responsible  





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               managing employee shall meet the qualifications for the  
               license classification.

             b)   If a partnership, a general partner or responsible  
               managing employee shall meet the qualifications for the  
               license classification.

             c)   If a corporation, or any other combination or  
               organization, a responsible managing officer or responsible  
               managing employee shall meet the qualifications for the  
               license classification.

          4)Further, requires the individual who meets the qualification  
            for licensure to be held responsible for exercising direct  
            supervision and control over the operation of the contractor  
            business in order to ensure full compliance with the  
            Contractors Law.

          5)Permits a contractor's license number to be reissued or  
            reassigned to an immediate family member of a licensed  
            individual who is deceased or absent if the license is  
            required to continue an existing family contracting  
            business, or to a corporation created by immediate family  
            members of a licensed individual to continue an existing  
            deceased or absent individual licensee's contracting  
            business.  An "immediate family member" for these  
            purposes is a spouse, brother, sister, son, daughter,  
            stepson, stepdaughter, grandson, granddaughter,  
            son-in-law or daughter-in-law.

          6)Requires, under certain circumstances, a contractor to  
            use a home improvement contract or a service and repair  
            contract, and requires the contracts to contain specified  
            elements and make specific disclosures and notices,  
            including a notice concerning general liability  
            insurance.

          Existing law (Corporations Code):

          1)Establishes the Beverly-Killea Limited Liability Company Act  
            (LLC Act), to provide for "limited liability companies" (LLCs)  
            to organize and do business in California, and allows foreign  
            LLCs (any LLC organized outside of California) to register to  
            do business in this state.

          2)Provides that an LLC may engage in any lawful activity except  





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            banking, insurance or trust company operations or the offering  
            of professional services for which a license, certification or  
            registration is required, unless expressly authorized under  
            provisions of the Business and Professions Code or the  
            Chiropractic Act.

          This bill:

          1)Includes limited liability company within the definition  
            of "person" for purposes of the Contractors Law.

          2)Defines "qualifying person," "qualifying individual," or  
            "qualifier" as a person who meets the qualifications for  
            the license classification on behalf of the license  
            applicant.

          3)Authorizes the issuance of a contractor's license to a  
            limited liability company (LLC), and mirrors the  
            provisions regulating contractor's licenses issued to a  
            corporation and applies them to contractor's licenses  
            issued to LLCs.

          4)Provides that if an LLC applies for a contractor's  
            license, a responsible managing officer, responsible  
            managing manager, or responsible managing employee shall  
            meet the qualifications for the license classification.

          5)Requires as a condition of licensure, in addition to any  
            required bond, that an LLC shall file with the Registrar  
            of Contractors evidence of security for claims based upon  
            acts, errors or omissions by the LLC's contracting  
            services.  The security shall be any of the following:

             a)   Liability insurance of not less than $1,000,000.

             b)   Maintain in trust or bank escrow, cash, bank  
               certificates of deposit, U. S. Treasury obligations,  
               bank letters of credit, or bonds of insurance or  
               surety companies for payment of liabilities of not  
               less than $500,000.

             c)   A combination of both a) and b).

          6)Specifies that an immediate family member for purposes of  
            reassignment of a deceased or absent individual's license  
            also includes a father, mother, grandfather, and  





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            grandmother.

          7)Revises the notice concerning general liability insurance  
            in the home improvement contract and the service and  
            repair contract to require an LLC to provide a notice  
            regarding the liability insurance or trust or bank escrow  
            deposits under item # 5), above.

          8)Makes related, conforming provisions to incorporate LLCs  
            within the licensing scheme for contractors and makes  
            technical, correcting, and clarifying changes.

          9)Authorizes, under the LLC Act, a limited liability  
            company to render services that may be lawfully rendered  
            only under a license, certificate, or registration  
            authorized by the Business and Professions Code, if the  
            Code authorizes a limited liability company to hold that  
            license, certificate, or registration.

          FISCAL EFFECT:  Unknown.  This bill has been keyed "fiscal"  
          by Legislative Counsel.

          COMMENTS:

           1.NOTE  :  Last Year's SB 1337 (Correa).  This bill is a  
            reintroduction of last year's SB 1337 (Correa) which  
            failed passage in Senate Judiciary Committee.  That bill  
            passed this Committee on a 6-0 vote.

          The primary differences between this bill and SB 1337 is  
            the requirement in this bill for a LLC to carry  
            $1,000,000 in liability insurance or $500,000 in liquid  
            assets (see "This Bill" item # 5, above).  Last year's  
            bill did not contain any requirement for an LLC to have  
            liability coverage, but only required the LLC to adhere  
            to the same licensing bond provisions as a corporation  
            holding a contractor's license ($12,500 licensing bond).

          Concern was raised in the Senate Judiciary Committee  
            whether liability insurance should be required for an LLC  
            that is at least equal to that required for an architect,  
            accountant, or attorney LLP.  In response to that issue,  
            this measure has been introduced with the liability  
            provisions described above.  

          It appears that a consequence of the bill's requirement for  





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            an LLC contractor to carry $1,000,000 in liability  
            insurance or $500,000 in liquid assets may be to preclude  
            smaller contractor businesses from organizing as an LLC  
            due to the costs of the required liability coverage.   
            Last year, one of the arguments made by the proponents  
            was that the bill would have advantages for both large  
            and small contractors' businesses; that the LLC structure  
            provided flexibility which is often needed for small  
            businesses, and more easily allows a family business to  
            be passed down to other family members.  It does not  
            appear that the same arguments are being made for this  
            year's bill.  Discussions with the proponents have  
            indicated that it is more likely that larger business  
            will organize as LLCs under the bill.

          2.Purpose.  This bill is sponsored by the  Associated  
            General Contractors of California  and  Associated General  
            Contractors of San Diego  (Sponsors) to authorize issuance  
            of a contractor's license to limited liability companies.

          The Sponsors state that the existing Contractors Law is  
            archaic since most states allow an LLC to hold a  
            contractor's license, and the current law is an  
            impediment to established nationwide business doing  
            business in California.  The Sponsors believe that the  
            LLC form of business has needed flexibility for  
            distribution of profits and losses separate from control  
            and ownership which benefits commerce with no foreseeable  
            detriment.

          The Sponsors argue that the exclusion of LLCs from the  
            Contractors Law was not a calculated decision since the  
            Contractors Law was adopted in 1929 and the existing LLC  
            Act was adopted in 1994.  Now, according to the Sponsors,  
            14 years after the passage of the LLC Act, LLCs comprise  
            an indelible part of the business landscape in California  
            and throughout the United States.  This bill is necessary  
            so that LLCs may be utilized in the construction industry  
            just as they are in other industries in California.  Of  
            the 29 states that license or regulate contractors, only  
            California imposes a complete ban on operating as an LLC,  
            according to the Sponsors.

          3.Background.  Limited liability companies are a relatively  
            new form of business entity for the state.  Formation and  
            operation of such entities in California was authorized  





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            in 1994 through the Beverly-Killea Limited Liability  
            Company Act (SB 469, Chapter 1200, Statutes of 1994).  As  
            originally enacted, an uncodified provision specified  
            that nothing in the Act shall be construed to permit a  
            domestic or foreign limited liability company to render  
            professional services, as defined in the Corporations  
            Code, unless expressly authorized under applicable  
            provisions of the Business and Professions Code or the  
            Chiropractic Act.  This provision was codified in 1999  
            (SB 284, Kelley, Chapter 1000, Statutes of 1999). 

          Under the Moscone-Knox Professional Corporation Act  
            (Corporations Code  13400 ff.), "professional services"  
            is defined as any type of professional services that may  
            be lawfully rendered only pursuant to a license,  
            certification, or registration authorized by the Business  
            and Professions Code, the Chiropractic Act, or the  
            Osteopathic Act.  

          The rationale for the exclusion was apparently that service  
            providers who harm others by their misconduct,  
            incompetence, or negligence should not be able to limit  
            their liability by operating as an LLC and thus become  
            potentially judgment-proof. 

          Based upon these provisions of law, it has been commonly  
            understood that the boards and bureaus under the  
            Department of Consumer Affairs are prohibited from  
            issuing a license, certification or registration to an  
            entity organized as an LLC.

          4.Attorney General Opinion.  In 2004, Attorney General  
            Opinion No. 04-103 concluded that a business that  
            provides services requiring a license, certification, or  
            registration pursuant to the Business and Professions  
            Code may conduct its activities as a limited liability  
            company if the services rendered require only a  
            nonprofessional, occupational license.

            In discussing the distinctions between professional  
            services and nonprofessional occupational services, the  
            AG Opinion further discusses Mann v. Department of Motor  
            Vehicles (1999) 76 Cal.App.4th 312, (Mann), in which the  
            court concluded that the services performed pursuant to a  
            vehicle salesperson license issued under the Vehicle Code  
            were not "professional services," but rather were  





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            "nonprofessional, occupational" services.  

            The AG Opinion further states that: 

               Following the reasoning of Mann, we find that some  
               services that require a license, certification, or  
               registration pursuant to the Business and Professions  
               Code are "professional services" and others are  
               "nonprofessional services."  To determine whether a  
               particular service is one or the other requires an  
               examination of the educational, training, and testing  
               prerequisites.

          5.DCA Legal Affairs Letter Regarding LLCs under the  
            Department.  In a May 23, 2006 letter from the DCA Legal  
            Affairs Office regarding the issuance of contractor  
            licenses by the CSLB to an LLC, the Department's legal  
            counsel stated that "with respect to the CSLB, we do not  
            believe that it has the legal authority to issue a  
            contractor's license to an LLC."  In discussing reasons  
            for its conclusion, the letter discussed the AG Opinion  
            (No. 04-103) and its reliance upon the Mann decision's  
            distinction between professional services and  
            nonprofessional services by looking at the requirements  
            to obtain the license in question.  DCA counsel stated:

               The requirements to obtain a contractor's license  
               include an experience requirement, character, fiscal  
               responsibility, and a written examination.  While it  
               could be argued that the requirements are not similar  
               to the "learned" professions, such as architecture or  
               engineering, they nonetheless include requirements for  
               four years of experience and state testing.  When  
               applied to the requirement to obtain a contractor's  
               license, the Mann test does not provide a definitive  
               answer as to whether a contractor's services should be  
               characterized as professional or nonprofessional. 

            DCA counsel concluded that it is debatable whether a  
            contractor's license should be characterized as  
            professional or nonprofessional for the purposes of  
            determining whether an LLC should be permitted to obtain  
            a contractor's license.

          6.Related legislation.   SB 1225 (Harman, Chapter 114,  
            Statutes of 2008)  allows a LLC to operate as a cemetery  





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            authority (cemetery owner) and provide various cemetery  
            and funeral-related services, by employing persons  
            licensed for these services, if the LLC maintains a  
            specified minimum amount of insurance or assets.   
            Prohibits a person licensed to provide any cemetery or  
            funeral-related service from having any ownership  
            interest as a member of a cemetery LLC.

           AB 2235 (Parra, 2006)  would have expanded the definition of  
            "person" under the Real Estate Law to include an LLC.   
            That bill died in the Senate Judiciary Committee without  
            being heard.

           SB 1022 (Campbell, 2005)  sought to authorize professional  
            limited liability companies to provide specified  
            professional services.  That bill would have defined  
            "professional services" to mean any type of professional  
            services that may only be lawfully rendered pursuant to a  
            license, certification, or registration under the B&P  
            Professions Code or the Chiropractic Act.  That bill died  
            in the Senate Judiciary Committee without being heard.

           AB 2724 (Runner, 2002)  would authorize contractor's  
            licenses to be issued to limited liability companies that  
            meet certain requirements.  That bill died in the  
            Assembly Business and Professions Committee without being  
            heard.

           AB 2401 (Miller, 1996)  would have provided that an LLC may  
            not render professional services, unless the LLC is  
            expressly authorized under the B&P Code or the  
            Chiropractic Act, or is a real estate broker licensed  
            under the real estate law.  The bill sought to amend the  
            contractor, architectural, engineering, and land  
            surveying provisions of the B&P Code to authorize the  
            licensure of LLCs.  That bill failed passage in Senate  
            Business and Professions Committee.

           AB 1541 (Lee, Chapter 505, Statutes of 1995)  included LLCs  
            in the statutory definition of the types of business  
            entities (e.g., corporations) that can be licensed as  
            repossession agencies, and specified the contents of an  
            application for license by a limited liability company.

           SB 469 (Killlea, Chapter 1200, Statutes of 1994)   
            established the initial LLC Act, to provide for LLCs to  





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            organize and do business in California, and allow LLCs  
            organized outside of California to register to do  
            business in California.  The bill provided that an LLC  
            may engage in any lawful activity except banking,  
            insurance or trust company operations, and in an  
            uncodified provision, stated that nothing in the Act  
            shall be construed to permit an LLC to render  
            professional services, as defined, for which a license,  
            certification or registration is required, unless  
            expressly authorized under provisions of the B&P Code or  
            the Chiropractic Act.

           SB 141 (Beverly, Chapter 57, Statutes of 1996)  corrected  
            various technical inconsistencies in the LLC Act, and  
            made other revisions.  

          7.Arguments in Support.  The  California Landscape  
            Contractors Association  (CLCA) supports the bill, and  
            states that LLCs are a common way for contractors to  
            organize their businesses in most other states.  CLCA  
            states that concerns about consumer harm from an  
            inadequately capitalized or undersized or underinsured  
            LLC who is found liable for a construction defect or some  
            other business related tort claim is addressed by  
            requiring the LLC to maintain at least $1 million of  
            liability insurance or hold at least $500,000 in liquid  
            capital assets or an equivalent surety bond.  CLCA  
            recognizes that the provisions of the bill may preclude  
            smaller contractors from organizing as LLCs, but still  
            believes that the bill is a step in the right direction.

          The  Engineering Contractors Association  , the  Marin Builders  
            Association  , the  California Fence Contractors  
            Association  , the  Flasher/Barricade Association ,   the  
             Engineering and Utility Contractors Association  , and the  
             Golden State Builders Exchanges  argue in support that  
            California is the only state that licenses contractors  
            that does not allow a license to be issued to an LLC; and  
            strongly supports the bill arguing that LLCs provide  
            businesses flexibility to distribute profits and losses  
            to owners without double taxation and does not  
            disadvantage consumers because they provide no greater  
            liability protection for the personal assets of owners  
            than current "C" or "S" corporations.

          8.Authors Amendments.  





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             A.   Discussions between the Sponsors and the  
               Contractors State License Board have suggested that  
               the implementation of the bill should be delayed until  
               January 1, 2011, so that the CSLB would have time to  
               make the revisions to its applications and processes  
               to incorporate the necessary changes required to  
               license LLCs as contractors.  

             The Author is proposing amendments in Committee to delay  
               the implementation of the bill until January 1, 2011.

             B.   A number of technical, clean-up amendments have  
               been noted which need to be made in the bill,  
               including the following:

               On page 3, line 6, strike out "of any"
               On page 7, line 12, strike out "in" and insert:  on
               On page 28, line 16, after "manager" insert a comma.
               On page 37, line 4, strike out "about" and insert:   
               About
               On page 48, line 16, strike out "a size equal" and  
               "to"

               The Author is proposing technical amendments to make  
               the necessary corrections in the bill. 


          Note  :  Double referral to Judiciary Committee (second).
          
          This bill has been double referred to both the Business and  
          Professions Committee and the Senate Judiciary Committee.   
          The Judiciary Committee heard the original legislation  
          creating the LLC law in 1994, which was designed to give  
          businesses an additional method to operate and reduce the  
          personal liability exposure of individuals while providing  
          businesses with a more favorable tax treatment.  If this  
          bill is passed by the BP&ED Committee, it will be referred  
          to the Judiciary Committee.

          
          SUPPORT AND OPPOSITION:
          
           Support:   

          Associated General Contractors of California (Sponsor)





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          Associated General Contractors of San Diego (Sponsor)
          California Fence Contractors Association
          California Landscape Contractors Association
          Engineering and Utility Contractors Association
          Engineering Contractors Association
          Flasher/Barricade Association
                                                                               Golden State Builders Exchanges
          Marin Builders Association



           Opposition:  

          None received as of April 7, 2009



          Consultant:G. V. Ayers