BILL ANALYSIS                                                                                                                                                                                                    



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          Date of Hearing:   July 9, 2009

                           ASSEMBLY COMMITTEE ON JUDICIARY
                                  Mike Feuer, Chair
                     SB 392 (Florez) - As Amended:  June 24, 2009

           SENATE VOTE  :   36-0
           
          SUBJECT  :   Limited Liability Companies:  Licensed Contractors

           KEY ISSUES  :  

          1)SHOULD LIMITED LIABILITY COMPANIES BE ALLOWED TO OBTAIN A  
            CONTRACTORS LICENSE DESPITE THE LONGSTANDING GENERAL RULE  
            PROHIBITING LLCs FROM ENGAGING IN LICENSED ACTIVITIES?

          2)IF LLCs SHOULD BE GRANTED CONTRACTORS LICENSES, DOES THIS BILL  
            PROVIDE SUFFICIENT LIABILITY PROTECTION FOR CONSUMERS AND  
            EMPLOYEES? 

          3)IF THERE IS NOT YET AGREEMENT OR CERTAINTY ABOUT THE POTENTIAL  
            FOR UNSATISFIED WAGE OR OTHER CLAIMS, IS THERE A CRITICAL  
            REASON WHY THIS BILL SHOULD MOVE FORWARD AT THIS TIME?

           FISCAL EFFECT  :   As currently in print this bill is keyed  
          fiscal.

                                      SYNOPSIS
          
          This bill would allow a limited liability company (LLC) to be  
          licensed as a construction contractor, departing from the  
          general rule that LLCs cannot engage in "professional services"  
          under the Beverly-Killea Limited Liability Company (LLC Act), a  
          principle that has been in place since the LLC Act was  
          originally codified in light of the fact that LLCs immunize the  
          owners of the business from personal liability.  Supporters  
          state that the existing prohibition against awarding contractors  
          licenses to LLCs is archaic and an impediment to attracting  
          established nationwide businesses to do business in the state.   
          Supporters argue that the LLC form of business has needed  
          flexibility for distribution of profits and losses that make it  
          a more desirable form of business, which benefits commerce with  
          no foreseeable detriment.  Opponents represent the building and  
          construction trades and other labor organizations.  They contend  
          that they have had difficulty collecting unpaid wages because of  








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          a record-breaking downturn in the construction industry, and  
          they fear that if the bill were enacted many construction  
          companies would make use of it in order to avoid personal  
          liability by the owners of the business, leaving workers without  
          recourse.  Although the bill offers some bonding requirements,  
          opponents contend the levels are woefully inadequate to meet  
          potential needs for large construction companies employing a  
          significant number of workers and obligated to pay prevailing  
          wages on large projects.
           
          SUMMARY  :  Notwithstanding the prohibition under the LLC Act  
          against a limited liability company providing licensed services,  
          authorizes the State Contractors License Board to issue a  
          contractors license to a limited liability company if the LLC  
          meets other requirements such as bonding, solvency, and  
          liability insurance.  Specifically,  this bill  : 

          1)Includes LLC within the definition of "person" for the  
            purposes of the Contractors State License Law (Contractors  
            Law). 

          2)Defines "qualifying person," "qualifying individual," or  
            "qualifier" as an individual who qualifies for a contractor's  
            license. 

          3)Authorizes the issuance of a contractor's license to a LLC,  
            and adds license requirements that mirror those of a  
            corporation. 

          4)Requires a LLC to provide security for claims by obtaining  
            liability insurance with a total aggregate limit of $1 million  
            for a limited liability company that employs five or fewer  
            licensed persons, and an additional $100,000 of insurance for  
            each additional person up to $5 million dollars in any one  
            designated period for a LLC that employs more than five  
            licensees rendering professional services on behalf of the  
            company.  Defines "designated period" to mean a policy year or  
            period less than 12 months.  A certification of coverage shall  
            be submitted to the commissioner by the licensee or applicant,  
            and signed by an authorized agent or employee of the insurer.

          5)Requires that if a LLC license is suspended, each person  
            within the company identified shall be personally liable up to  
            $1 million for damages against third parties in connection  
            with the company's performance during the period of  








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            suspension, for any act or contract where a license is  
            required. 

          6)Requires that if a LLC's contractor license has been suspended  
            or revoked as a result of disciplinary action, or a person who  
            was a qualifying individual for a licensee at any time during  
            which cause for disciplinary action occurred resulting in  
            suspension or revocation of the licensee's license, the CSLB  
            shall require as a condition precedent to the issuance,  
            reissuance, renewal, or restoration of a license to the  
            applicant, or to the approval of an application to change  
            officers of a corporation or a limited liability company, or  
            removal of suspension, or to the continued valid use of a  
            license which has been suspended or revoked, but which  
            suspension or revocation has been stayed, that the applicant  
            or licensee file or have on file a contractor's bond in a sum  
            to be fixed by the registrar based upon the seriousness of the  
            violation, but which sum shall not be less than fifteen  
            thousand dollars ($15,000) nor more than 10 times the amount  
            required by Section 7071.6.

          7)Requires that the qualifying individual for a LLC shall not be  
            required to file or have on file a qualifying individual's  
            bond if he or she owns at least a 10% interest in the LLC and  
            certifies this fact on a form prescribed by the registrar.

          8)Requires a LLC to include information of the liability  
            insurance or security it maintains at a financial institution  
            for change orders and service and repair contracts. 

          9)Makes this Act on January 1 of the year following the  
            effective date of the annual budget bill in which the  
            Contractors' State License Board receives an appropriation for  
            sufficient resources to implement this act and the  
            Contractors' State License Board notifies the Secretary of  
            State and Legislative Council that there is such an  
            appropriation.

           EXISTING LAW  :

          1)Pursuant to the Beverly-Killea Limited Liability Company (LLC)  
            Act of 1994, prohibits domestic and foreign limited liability  
            companies from rendering professional services in California.  
            (Corp. Code Sec. 17375.)  
           








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           2)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." (Corp. Code Sec. 13401(a).)  

          3)Provides for the licensure and regulation of contractors by  
            the Contractors State License Board (CSLB).  (Bus. & Prof.  
            Code section 7025 et seq.)

          4)Defines "person" for the purpose of the Contractors Law to  
            include an individual, a firm, co-partnership, corporation,  
            association or other organization, and prohibits any  
            unlicensed person from engaging in business or acting as a  
            contractor.  (Id.)

           COMMENTS  :   The author states that this bill is needed for the  
          following reasons:  
             
               The existing contractors' license law is archaic as most  
               states allow an LLC to hold a contractor's license -  
               California law is an impediment to established nationwide  
               businesses doing business in the state. 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.

               Fourteen years after 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 countless other industries throughout  
               California. Notably, this is already the case in other  
               States. Of the 29 States that license or regulate  
               contractors, only California imposes a complete ban on  
               operating as an LLC. 

               LLCs are a desired entity for construction companies, as  
               they are with many other industries, primarily because LLCs  
               provide the flexibility to distribute profits and losses to  
               owners without double taxation, in a manner similar to  
               corporations electing "S" status under the Internal Revenue  
               Code, but without the limited shareholder qualifications,  
               i.e. "S" corporation shareholders must be individuals with  
               very limited exceptions and the number of shareholders is  








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               limited to 100. This flexibility as to the identity of  
               shareholders is coveted for achieving estate planning  
               objectives. Similarly, an "S" corporation's largest  
               shareholders receive the largest share of profits. The LLC  
               for of business allows the owners to dictate how the  
               profits are split and taxed without dictation by the  
               percentage ownership.

               This improved estate planning and profit sharing  
               flexibility will have no negative impact on consumers of  
               construction services in California. An LLC provides  
               liability protection for the personal assets of owners  
               equivalent to, but not more than, that afforded  
               corporations.

           Limited Liability Companies Are Believed To Offer Businesses  
          Significantly More Desirable Tax And Nontax Benefits Compared To  
          Other Forms, With Unknown Revenue Implications For The State.    
          Generally, a limited liability company is a legal entity formed  
          under the Beverly-Killea Limited Liability Company Act that  
          allows one or more owners to conduct a business without any  
          owner having personal liability for the obligations of the  
          business.  While members of an LLC are commonly thought to be  
          individuals, they may also be corporations or other business  
          entities.

          The salient nontax characteristics of a limited liability  
          company (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).  Unlike a corporation,  
          an LLC can have different classes of ownership and may allocate  
          income, gains, losses, and other items disproportionately among  
          owners without affecting the LLC's pass-through tax treatment.  

          There are also important tax consequences.  In regular  
          corporations, both the entity and the shareholders are taxed on  
          the increased value of the property when the property is sold or  
          the corporation is liquidated.  LLCs avoid this tax.  In  
          addition, because the LLC usually 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 tax returns, the  
          distribution depending on the terms of the LLC agreement, not  
          necessarily the ownership interest of the individual members.   








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          Combined with the ability of LLCs to allocate income, gains,  
          losses, and other items disproportionately among owners, LLCs  
          may be arranged in such a way as to create significantly more  
          desirable tax treatment than corporations or other forms of  
          business organization.  

          Naturally, more favorable tax consequences for the owners may  
          translate into less tax revenue for the state.  The Revenue and  
          Taxation Committee advises that, to deal with these revenue  
          consequences, existing law requires California LLCs to file tax  
          returns and pay an $800 annual LLC tax, similar to the minimum  
          tax paid by "S" corporations.  In addition to the LLC tax,  
          California LLCs must also pay an LLC fee between $900 and   
          $11,790 based on its total income from all sources derived or  
          attributable to this state.  It is understood that these fees  
          are not as progressive as the corporate or personal tax rates.   
          However, this bill has not been referred to the Revenue and  
          Taxation Committee and it is unknown whether these LLC fees  
          would be a net loss or gain for state revenues. 

          These more desirable tax and nontax characteristics, and the  
          ease by which LLCs can be created, lead the bill's opponents to  
          believe that if construction companies are permitted to organize  
          as LLCs a large number will do so who are not now willing or  
          able to incorporate in order to shield themselves from personal  
          liability, creating new obstacles to recovery of wages and  
          benefits. 

          Until the creation of LLCs in 1994, 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.  

          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.  (Corp.  
          Code Secs. 17101, 17150.)

          Although an S corporation allows pass-through tax treatment and  








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          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 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.   
          Any person, as well as corporations, can be a member of an LLC  
          (thus sidestepping the restrictions on shareholders in the case  
          of an S corporation).

           General Prohibition Against Engaging In Licensed Activities As  
          An LLC.   While LLCs may generally engage in any lawful business  
          activity (except banking, insurance, or trust company  
          operations), the Beverly-Killea Limited Liability Company 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 the Business and Professions  
          Code, the Chiropractic Act, or the Osteopathic Act.  (Corp. Code  
          Sec. 17375.)

          The rationale for the Beverly-Killea LLC Act's exclusion of  
          professional services from the business that an LLC may  
          undertake has been 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  
          potentially become judgment proof.

          In 2004, the Attorney General (AG) issued an opinion, in  
          response to a request from the Secretary of State, on the  
          question of whether a business that provides services requiring  
          a license, certification, or registration pursuant to the  
          Business and Professions Code may conduct its business as a  
          limited liability company.  The AG opinion 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."  (Op. No. 04-103, 87  
          Ops. Cal. Atty. Gen. 109 (July 23, 2004).)








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          The AG opinion is clear that an LLC is not permitted to render  
          professional services, while an LLC would be permitted to  
          perform "nonprofessional occupational services" without  
          violating the Beverly-Killea LLC Act.  However, the opinion also  
          recognized that for some purposes, the term "professional  
          services" has been broadly construed to include more than the  
          traditionally considered "learned" professions such as medicine,  
          law, or engineering, but includes such skilled services such as  
          plumbing.  (Amex Assurance Co. v. Allstate Ins. Co. (2003) 112  
          Cal.App.4th 1246, 1252; Hollingsworth v. Commercial Union Ins.  
          Co. (1989) 208 Cal.App.3d 800, 806.)

          In 1995, SB 513 (Calderon, Ch. 679, Stats. 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 limited liability partner (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 (Bus. & Prof. Code Sec. 16956) was extended to  
          architects, under the same conditions as accountants and  
          attorneys, for a trial period of ten years (AB 469, Cardoza, Ch.  
          504, Stats. 1998).  In 2006, the repeal date for architects was  
          extended to 2012 and the liability coverage requirement was  
          increased to $1,000,000 for partnerships of five or fewer  
          licensees, and an additional $100,000 per additional licensee up  
          to a maximum of $5,000,000.  (AB 2914, Leno, Ch. 426, Stats.  
          2006.)  In 2007, SB 414 (Corbett, Ch. 80, Stats. 2007) updated  
          the liability coverage requirement for accountants and attorneys  
          to that applicable to architects.  To date, only attorneys,  
          accountants, and architects are permitted to operate as LLPs  
          under the conditions specified for liability coverage.  

           Prior Legislative Proposals To Authorize LLCs To Engage In  
          Licensed Activities.   This bill would authorize the State  
          Contractors' License Board to issue to a limited liability  
          company (LLC) a license to provide contactor services, if the  
          LLC meets the liability coverage requirements provided in the  
          bill (and meets other licensing requirements).  Last year, SB  
          1337 (Correa) would have done the same, but without requiring  
          the LLC to provide any additional liability coverage in the  
          event of damages to a consumer.  That bill died in the Senate  








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          Judiciary Committee.  

          According to the author, there was at least one prior effort  
          like SB 392.  In the 1995-1996 session AB 2401 (Miller), sought  
          to allow contractors to operate as limited liability companies.   
          That bill was later broadened to include several other  
          industries and ultimately died in the Senate Judiciary  
          Committee.

          Last year, SB 1225 (Harman, Ch. 114, Stats. 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 & 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.

          If SB 392 is enacted, contractors would be the first of 54  
          professional and semi-professional licensee groups that, until  
          now, could not be an LLC providing those services.  

           Current Bonding Requirements.   Under this bill, LLCs wishing to  
          obtain a contractor's license would be subject to the same  
          bonding requirement as existing licensees.  Individual licensees  
          are required to maintain a contractor's bond in the sum of  
          $12,500, at least $7,500 of which is dedicated for the benefit  
          of a homeowner with a homeowner improvement contract for his or  
          her personal family home, and whose home was damaged as a result  
          of a violation.  The aggregate liability of a surety on a claim  
          for wages and fringe benefits brought against either bond may  
          not exceed $4,000.  If any a bond required by this article is  
          insufficient to pay all claims in full, the sum of the bond  
          shall be distributed to all claimants in proportion to the  
          amount of their respective claims.

          In addition, a corporate licensee and persons other than a sole  
          proprietor, general partner, or a joint venture licensee are  
          required to post a further bond in the amount of $12,500, of  
          which $7,500 is reserved for the damaged homeowner as described  
          above, and the rest available to other beneficiaries named above  
          (employee, other persons).  This bond may be waived if the  
          qualifying individual owns 10% or more of the corporation's  
          stock.  Likewise under this bill a LLC is not required to file  
          or have on file this bond if he or she owns at least a  
          10-percent membership interest in the limited liability company.








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          In addition to these bonds, the author proposes a new "wage  
          bond" for LLCs, as discussed below.

           Liability Insurance Required.   This bill requires a LLC to  
          provide security for claims by obtaining liability insurance  
          with a total aggregate limit of $1 million for a limited  
          liability company that employs five or fewer licensed persons,  
          and an additional $100,000 of insurance for each additional  
          person up to $5 million dollars in any one designated period for  
          a LLC that employs more than five licensees rendering  
          professional services on behalf of the company.  A "designated  
                                 period" means a policy year or period less than 12 months. 

           Modest Net Worth Requirement.   The bill does not propose to  
          change the existing rule that individuals seeking a contractor's  
          license show evidence of minimal solvency - i.e., operating  
          capital of greater than $2,500.  By contrast, where other  
          entities where individuals are shielded from personal liability  
          are permitted to engage in licensed activities, net worth  
          requirements are substantially higher. 

          The practice with respect to corporations generally is based on  
          transparency - publicly traded companies must make certain  
          filing statements that contain basic information about corporate  
          assets to which a consumer or employee could obtain access  
          before transacting business or agreeing to perform labor.  There  
          are no such transparency or access obligations with respect to  
          LLCs.  

          For businesses other than corporations, there are minimum net  
          worth requirements in many cases where the business is engaged  
          in a licensed activity.  Thus, current law authorizes attorneys,  
          accountants, and architects to organize themselves as LLPs and  
          to provide professional services, so long as the LLP maintains a  
          net worth of at least $10 million, and obtains liability  
          insurance coverage or maintains bank deposits of $1 million for  
          partnerships of five or fewer licensees and an additional  
          $100,000 for each additional licensee up to a maximum of $5  
          million for all others.  These figures were updated last year by  
          SB 414 (Corbett).  Limited liability partnerships are required  
          to register with the Secretary of State, and LLP partners are  
          only personally liable for those torts in which they personally  
          participated and are not jointly and severally liable for any  
          other torts or debts of the partnership.








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          Similarly, under the Financial Code an escrow agent shall  
          maintain at all times a tangible net worth of fifty thousand  
          dollars ($50,000), including liquid assets of at least  
          twenty-five thousand dollars ($25,000) in excess of current  
          liabilities; licensed finance lenders and brokers must maintain  
          a net worth of at least twenty-five thousand dollars ($25,000);  
          to obtain a license to make deferred deposit transactions, an  
          applicant must have a net worth of at least twenty-five thousand  
          dollars ($25,000); residential mortgage lenders shall maintain a  
          minimum tangible net worth at all times of two hundred fifty  
          thousand dollars ($250,000).  Business and industrial  
          development corporations moreover must demonstrate net worth of  
          at least $1.5 million to obtain a license from the Commissioner  
          of Financial Institutions.  Under the Insurance Code, each  
          broker-agent of fire and casualty insurance shall have a net  
          worth of at least five million dollars ($5,000,000).

           Concern Regarding Potential To Pierce Veil Of LLCs As With  
          Corporations.   Opponents are concerned that it is uncertain  
          whether or in what circumstances it may be possible for an  
          aggrieved person to recover against the members of an LLC as  
          they now can against a corporation under the doctrine known as  
          "piercing the corporate veil."  Cases involving LLC  
          veil-piercing have just recently reached the higher courts of  
          other states that have had LLC statutes longer than California.   
          Although some courts have suggested that veil-piercing liability  
          may be the same for members of LLC's as for shareholders in a  
          corporation (See, e.g., Kaycee Land and Livestock v. Flahive,  
          2002 WY 73 (Wyo.2002)) especially if there was an inadequate  
          capitalization and representations that other entities would be  
          responsible for the LLC's debt, there are other courts that  
          would provide more protection for the LLC (See Bonner v. Brunson  
          (2003) 262 Ga.App.521, 585 S.E.2d 917, cert. denied, (Jan. 12,  
          2004)(veil of an LLC should not be pierced absent an "abuse" of  
          the LLC).  Some states have LLC statutes that expressly provide  
          for application of the corporate veil-piercing standard to LLCs,  
          e.g., Colorado, Georgia, and Montana.

          Under the Beverly-Killea LLC Act, no person who is a manager or  
          officer or both a manager and officer of an LLC is personally  
          liable for any debts, judgments, or obligations of the LLC.  A  
          manager may however agree to be personally liable if this is set  
          out in the LLC's articles of organization or other writing.   
          (Corp. Code Sec. 17158.)  As to the personal liability of other  








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          members of the LLC, the LLC Act is silent; thus, it is not clear  
          that it would be easy to reach assets of LLC owners, who benefit  
          from the tax advantages as well as the shield provided to their  
          personal assets in the course of managing their business with  
          much less formalities than a corporation, to remedy wrongs done  
          to consumers.  SB 392 would remove this uncertainty when the  
          LLC's license has been suspended, by making the members liable  
          for up to $1,000,000 in damages during that period (assuming the  
          members had the assets to meet that liability), but not  
          otherwise.

           Is The Proposed Wage Bond Adequate To Meet Potential Needs?   In  
          response to opposition concerns (noted below), the author  
          proposes to require a "wage and welfare" bond in the amount of  
          $25,000 for an LLC operating under a contractors license.   
          According to the sponsor, this proposal is based on an existing  
          requirement for car wash companies under Labor Code 2055(b).

          This proposed amendment has apparently been shared with the  
          opposition, who indicate that is inadequate to address their  
          concerns because, they argue, wage and benefit claims may far  
          exceed the amount of the proposed bond.  By way of comparison,  
          the State Building and Construction Trades Council comments that  
          federal law requires union officials with potential financial  
          responsibilities to post a much higher fidelity bond of $500,000  
          or ten percent of the total amount of funds handled, pursuant to  
          29 USC section 502.

           The Committee may wish to explore with the author  whether this  
          proposed $25,000 wage bond is sufficient to meet the realistic  
          needs of all or most construction contractors.  It is not known  
          whether experience with the $25,000 bond has proved to be  
          adequate to meet the needs in the car wash industry.  Moreover,  
          the construction industry may well be sufficiently different in  
          size, complexity, wages, pensions, health and other benefits  
          that a significantly larger bond may be more appropriate.  There  
          is also the question whether a flat bond requirement is  
          appropriate in light of the variation in size among construction  
          licensees who may organize as LLCs, ranging from individuals who  
          are now employed as sole proprietors engaged in a few small  
          projects, to large corporations with hundreds of workers in  
          multiple large public works projects.  
          Setting the bond at one amount for all these varying companies  
          has some precedent - e.g., SB 43 (Alquist) proposes that  
          specified design-build contracts may be required to provide a  








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          payment bond of not less than one-half of the contract price or  
          three hundred million dollars ($300,000,000), whichever is less.  
           But such an approach could be overly burdensome for small  
          contractors or insufficiently protective in the case of large  
          companies.  A scaled approach based on the size and extent of  
          potential wage and benefit claims may therefore be more  
          appropriate.  This is the approach taken with respect to the  
          insurance obligation in the bill, for example, which is scaled  
          based on the number of LLC members.  However, the number of LLC  
          members may be an unduly crude mechanism for assessing potential  
          wage claim exposure because a large construction company  
          organized as an LLC may have only a few owners.  (Indeed, the  
          number of LLC members would appear to be a very rough measure  
          for liability insurance purposes as well; unlike lawyers and  
          accountants whose capacity to injure others is related to the  
          number of practicing members, it would appear that the number of  
          LLC members may be largely unrelated to the scope of potential  
          injury a construction LLC may cause.)  It would therefore appear  
          more appropriate to develop a more sophisticated metric for  
          relating potential exposure to bonding level. 

           ARGUMENTS IN OPPOSITION:   A coalition of labor organizations in  
          the building trades opposes the bill, arguing:
           
                Presently, contractor licenses can be issued to both  
               corporations and partnerships and it would seem logical to  
               provide LLCs with the same ability.  However, partners are  
               held personally liable for partnership debts and there is a  
               well-established body of law that allows plaintiffs to  
               "pierce the veil" of a corporation to hold the owner of the  
               company personally liable for debts, including back wages,  
               if the corporation is under the owner's management or was  
               inadequately capitalized.    There is no such body of law  
               for LLCs that protects workers.    Thus, there is a risk  
               that allowing LLCs to receive contractors' licenses will  
               enable individuals, partnerships and corporations to form  
               LLCs as a stronger protection against liability.  

               Contractors that currently function as sole proprietorships  
               or ordinary partnerships may be particularly likely to  
               become LLCs as this bill would provide the incentive to  
               form an LLC to obtain protection from personal liability  
               while retaining the same tax treatment.   In addition, even  
               if LLCs were required to buy liability insurance similar to  
               LLPs, the liability insurance would only cover a worker's  








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               injury by a contractors' negligence.  The insurance would  
               not cover ordinary debt run up by the LLC, such as for back  
               wages and benefits.  

               To cover the back wages to employees there would need to be  
               a bonding requirement sufficient to cover the wages.   
               Currently, some of the contractors' bonds are not that high  
               compared with the potential liability for back wages and we  
               routinely see situations in which small contractors declare  
               bankruptcy owing money.   We are also concerned that  
               expanding the types of legal entities that can hold  
               contractors' licenses will make it easier for contractors  
               to change their form in order to make it harder to hold  
               companies responsible for their safety records or to  
               organize them.  While this is already possible through the  
               creation of a new corporation, it would be more of a burden  
               to create a new corporation vs. an LLC in part because the  
               corporation has to pay taxes at the corporate level,  
               whereas the LLC does not.  

           REGISTERED SUPPORT / OPPOSITION  :

           Support 
           
          Associated General Contractors of California (Sponsor)
          Associated General Contractors of San Diego (Sponsor)
          Associated Builders and Contractors
          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 
           
          California Labor Federation
          California Teamsters Public Affairs Council
          California State Pipe Trades Council
          California State Association of Electrical Workers
          State Building and Construction Trades Council
          Western States Council of Sheet Metal Workers










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           Analysis Prepared by  :    Kevin G. Baker / JUD. / (916) 319-2334