BILL ANALYSIS                                                                                                                                                                                                    



                                                                       



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          |SENATE RULES COMMITTEE            |                   SB 392|
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                                 THIRD READING


          Bill No:  SB 392
          Author:   Florez (D)
          Amended:  4/21/09
          Vote:     21

           
           SENATE BUSINESS, PROF. & ECON. DEV. COMMITTEE  :  8-0,  
            4/13/09
          AYES:  Negrete McLeod, Wyland, Aanestad, Florez, Oropeza,  
            Romero, Walters, Yee
          NO VOTE RECORDED:  Corbett, Correa

           SENATE JUDICIARY COMMITTEE  :  5-0, 4/28/09
          AYES:  Corbett, Harman, Florez, Leno, Walters

           SENATE APPROPRIATIONS COMMITTEE  :  13-0, 5/11/09
          AYES:  Kehoe, Cox, Corbett, Denham, DeSaulnier, Hancock,  
            Leno, Oropeza, Runner, Walters, Wolk, Wyland, Yee


           SUBJECT  :    Limited liability companies:  licensed  
          contractors

           SOURCE  :     Associated General Contractors of California 
                      Associated General Contractors - San Diego


           DIGEST  :    This bill allows a limited liability company  
          (LLC) to render contractors services that are "professional  
          services" otherwise prohibited by the Beverly-Killea  
          Limited Liability Company, by authorizing the issuance of a  
          contractor's license to the company under the Business and  
          Professions Code.  This bill provides that a contractor-LLC  
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          obtain and maintain a 
          $1 million insurance policy or place on deposit or escrow  
          $1 million plus an additional $100,000 per licensee in  
          excess of five employed by the LLC, up to $5 million in  
          total insurance, escrow, or deposit, and provides, if the  
          LLC is suspended, each member of the LLC who is licensed as  
          a contractor will be liable for up to $1 million in damages  
          occurring as a result of the licensed activities of the LLC  
          during the suspension.  

           ANALYSIS  :    Existing law, the Beverly-Killea Limited  
          Liability Company Act, prohibits domestic and foreign  
          limited liability companies from rendering professional  
          services in California. (Section 17375 of the Corporations  
          Code)  

          Existing law defines "professional services" as "any type  
          of professional services which 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." (Section  
          13401(a) of the Corporations Code)  Only attorneys,  
          accountants, and architects have been authorized to render  
          professional services as limited liability entities in  
          California.

          This bill authorizes the Contractors State License Board to  
          issue a contractor's license to a limited liability company  
          provided a qualifying member of the LLC is licensed as a  
          contractor and the LLC meets all other requirements such as  
          bonding and  solvency of the LLC, and compliance by the LLC  
          with the liability insurance requirements, as specified.   
          This bill treats an LLC and a corporation similarly as to  
          the licensing process, as well as the renewal, suspension,  
          reissuance, and termination of the license for specified  
          reasons in the Business and Professions Code.

          This bill provides that notwithstanding the prohibition  
          under the LLC Act against an LLC providing professional  
          services unless pursuant to a license, certification or  
          registration, an LLC may render services if the applicable  
          provisions of the Business and Professions Code authorize a  
          LLC to hold that license, certificate or registration.
          







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           Background  

          Generally, an LLC is a legal entity formed under a  
          statutory scheme (in California, the Beverly-Killea LLC  
          Act) that allows one or more owners to conduct a business  
          without any owner having personal liability for the  
          obligations of the business.  The salient nontax  
          characteristics of an LLC are limited liability for its  
          owners (as in a corporation) and freedom to structure  
          management rights and financial interests in the entity in  
          virtually any configuration the parties wish (as in a  
          partnership).  An LLC most often elects to be treated as a  
          partnership for income tax purposes, so that the income,  
          gains, losses, deductions, and credits of the LLC generally  
          will flow through to its members for reporting on their  
          personal tax returns, the distribution depending on the  
          terms of the LLC agreement, not necessarily the ownership  
          interest of the individual members.

          Until the creation of LLCs, the limited partnership and the  
          subchapter S corporation were the primary forms of business  
          entity used to achieve the tax status and limited liability  
          features now offered by the LLC.  Each of those forms has  
          its drawbacks, but the LLC can provide the advantages of  
          both without the disadvantages of either.

          A limited partnership allows pass-through tax treatment,  
          flexibility in financial structuring, and limited liability  
          for the partners (as long as they do not take part in the  
          control of the business), but requires one person (the  
          general partner) to be fully liable for the obligations of  
          the business.  Unlike a limited partnership, no LLC member  
          need be personally liable for the company's obligations,  
          and yet each member is permitted to manage the company and  
          to take part in the control of the business without losing  
          the member's limited liability.  (Sections 17101 and 17150  
          of the Corporations Code)

          Although an S corporation allows pass-through tax treatment  
          and limited liability for all owners, S corporation status  
          limits the parties' flexibility in structuring their  
          financial arrangements because of the requirements that the  
          corporation have no more than one class of stock and that  
          items of income, gain, loss, deduction, or credit be  







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          distributed among shareholders on a pro rata basis.   
          Furthermore, only individuals, estates, certain types of  
          trusts, and certain tax-exempt organizations are permitted  
          to be S corporation shareholders, and an S corporation will  
          lose its pass-through tax treatment if an ineligible entity  
          becomes a shareholder.

          An LLC, on the other hand, can have different classes of  
          ownership, and income, gain, loss, and other items may be  
          allocated disproportionately to ownership without affecting  
          the LLC's pass-through tax treatment.  Any person can be a  
          member of an LLC (thus sidestepping the restrictions on  
          shareholders in the case of an S corporation).

          While LLCs may generally engage in any lawful business  
          activity (except banking, insurance, or trust company  
          operations), the Beverly-Killea LLC Act prohibits a foreign  
          or domestic limited liability company from rendering  
          professional services in this state unless expressly  
          authorized under applicable provisions of law.   
          "Professional services" are those services for which a  
          license, certification, or registration is required under  
          specified statutes.

          In 1995, SB 513 (Calderon), Chapter 679, Statutes of 1995,  
          authorized the establishment of limited liability  
          partnerships (LLPs) for licensed attorneys and licensed  
          accountants, provided the LLP purchased a liability  
          insurance policy or maintained bank deposits of at least  
          $100,000 per LLP (or an aggregate of not less than $500,000  
          for fewer than five partners and not more than $5 million  
          for all others).  Only partnerships with a net worth of $10  
          million or more were allowed to become LLPs.  In 1998, the  
          statute allowing professional LLPs (Section 16956 of the  
          Business and Professions Code) was extended to architects,  
          under the same conditions as accountants and attorneys, for  
          a trial period of 10 years [AB 469 (Cardoza), Chapter 504,  
          Statutes of 1998].  In 2006, the repeal date for architects  
          was extended to 2012, and the liability coverage  
          requirement was increased to $1 million for partnerships of  
          five or fewer licensees, and an additional $100,000 per  
          additional licensee up to a maximum of $5 million.  [AB  
          2914 (Leno), Chapter 426, Statutes of 2006]  In 2007, SB  
          414 (Corbett), Chapter 80, Statutes of 2007) updated the  







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          liability coverage requirement for accountants and  
          attorneys to that applicable to architects.

          Under the Beverly-Killea LLC Act, unless permitted by the  
          Business and Professions Code, an LLC cannot provide  
          professional services.  To date, only attorneys,  
          accountants, and architects are permitted to operate as  
          LLPs under the conditions specified for liability coverage.  
           Last year, SB 1225 (Harman), Chapter 114, Statutes of  
          2008, allowed a private cemetery that is an LLC to operate  
          as a licensed cemetery authority to own the cemetery and to  
          provide services by professionals licensed under the  
          Business and Professions Code.  SB 1225, however,  
          prohibited licensees of professional services rendered in  
          connection with the operations of a cemetery authority from  
          having any ownership interest in the LLC.

          This bill establishes the rules by which an LLC may provide  
          services as a licensed contractor.

           Prior Legislation
           
          SB 141 (Beverly), Chapter 57, Statutes of 1995, would have  
          added numerous categories of state regulated professional  
          service providers to the types of businesses that could  
          operate as LLCs.  However, opponents of the bill and the  
          bill's sponsor were unable to agree as to whether or not  
          professional or licensed LLC service providers should carry  
          adequate insurance to ensure their financial ability to  
          respond to legal judgments for contract or tort claims.   
          Consequently, those additional classes of businesses were  
          amended out of the bill prior to its enactment.

          SB 1337 (Correa), 2007-08 Session, was similar to SB 392,  
          but lacked the insurance and/or escrow deposit requirements  
          for the LLC and its members.  The bill died in the Senate  
          Judiciary Committee.

          AB 2401 (Miller), 1995-96 Session, would have allowed  
          contractors to operate as LLCs.  The bill died in the  
          Senate Judiciary Committee.

           FISCAL EFFECT  :    Appropriation:  Yes   Fiscal Com.:  Yes    
          Local:  Yes







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          According to the Senate Appropriations Committee:

                          Fiscal Impact (in thousands)

             Major Provisions                2009-10     2010-11     
             2011-12               Fund  

            LLC contractor            $5,397        $5,295     
            Special*
            licensing option

            License fees                  ($14,000)            
            ($14,000)           Special*

            Secretary of State            Unknown costs, supported  
            by                  General
                                existing registration process

            * Contractors' License Fund

           SUPPORT  :   (Verified  5/12/09)

          Associated General Contractors of California (co-source)
          Associated General Contractors - San Diego (co-source)
          California Fence Contractors Association
          California Landscape Contractors Association
          Engineering and Utility Contractors Association
          Flasher/Barricade Association
          Golden State Builders Exchange
          Marin Builders Association


          JJA:mw  5/13/09   Senate Floor Analyses 

                         SUPPORT/OPPOSITION:  SEE ABOVE

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