BILL ANALYSIS                                                                                                                                                                                                    



                                                                  SB 392
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          Date of Hearing:   June 15, 2010

                           ASSEMBLY COMMITTEE ON JUDICIARY
                                  Mike Feuer, Chair
                    SB 392 (Florez) - As Amended:  March 25, 2010

                              As Proposed to be Amended

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

          KEY ISSUE  :  SHOULD LIMITED LIABILITY COMPANIES (LLCs), WHICH ARE  
          FREQUENTLY ATTRACTIVE TO BUSINESS OWNERS BECAUSE LLCs PAY LITTLE  
          OR NO TAXES COMPARED TO CORPORATIONS AND OTHER FORMS OF  
          BUSINESS, BE ADDED TO THE LIST OF BUSINESS ORGANIZATIONS THAT  
          ARE ELIGIBLE TO OBTAIN A CONSTRUCTION CONTRACTORS LICENSE?

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

                                      SYNOPSIS
          
          This bill is back for rehearing after being held as a two-year  
          measure when it was initially presented to the Committee last  
          July.  In the interim, the author has taken amendments that have  
          removed all opposition by the building trades and other labor  
          groups. 

          The bill is sponsored by large construction contractors in order  
          to allow any qualified business organized as a limited liability  
          company (LLC) to obtain a construction contractors license.  A  
          LLC is a hybrid form of business that protects its owners from  
          any personal liability, like a corporation, while allowing the  
          business to avoid taxation by passing profits directly to the  
          owners, like a partnership.  LLCs also allow owners to allocate  
          rights and responsibilities in any way they wish, so that some  
          members of the LLC can have management and control while others  
          do not.  Historically, LLCs have not been permitted to engage in  
          licensed professional services under the Beverly-Killea Limited  
          Liability Company (LLC Act) in light of the fact that LLCs  
          immunize the owners of the business from personal liability.   
          This bill would make construction contractors the first to  
          obtain an exception from this rule.  Supporters state that the  
          existing prohibition against awarding contractors licenses to  
          LLCs is archaic, and an impediment to attracting established  








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          national companies to do business in the state.  They argue that  
          the LLC form has useful flexibility for distribution of profits  
          and losses that make it a more desirable arrangement.

          Labor groups have removed their opposition in light of  
          amendments that require an LLC to post a wage bond in the amount  
          of $100,000 for the benefit of workers employed by these  
          entities because of concerns that the limited liability of LLCs  
          could potentially leave workers without recourse if wages go  
          unpaid. 
           
          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  








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            with the company's performance during the period of  
            suspension, for any act or contract where a license is  
            required. 

          6)Requires that as a condition precedent to the issuance or  
            valid use of a LLC license the applicant or licensee file or  
            have on file a surety bond in the sum of $100,000 for the  
            benefit of any employee damaged by his or her employer's  
            failure to pay wages, interest on wages, or fringe benefits as  
            an additional safeguard for workers employed by or contracted  
            to work for a limited liability company.  If the LLC is a  
            party to a collective bargaining agreement, this bond shall  
            also cover welfare fund contributions, pension fund  
            contributions and apprentice program contributions. 

          7)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.

          8)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.

          9)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. 

          10)Provides that with respect to administrative proceedings or  
            hearings to suspend or revoke a contractor's license of a LLC  
            or any other type of licensee the CSLB shall have the burden  








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            of proof to establish by clear and convincing evidence that he  
            or she is entitled to the relief sought in the petition.

          11)Provides that the CSLB shall begin processing applications  
            for licensure from limited liability companies no later than  
            January 1, 2012. 

           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.)  
           
           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  








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               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  
               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 Larger  
          Businesses Significantly More Desirable Tax And Nontax Benefits  
          Compared To Other Forms, With Unknown Revenue Implications For  
          The State.   Generally, a LLC is a legal entity formed under the  
          Beverly-Killea Limited Liability Company Act, which allows one  
          or more owners to conduct a business without any owner having  
          personal liability for the obligations of the business.  The  
          owners of an LLC may be individuals, or they may be corporations  
          or other business entities.  That is, a group of corporations,  
          partnerships or individuals may combine to form and conduct an  
          LLC.  It is expected that many existing corporations may  
          re-organize as LLCs to take advantage of lower taxes, and that  
          partnerships may do so to limit their liability.

          The salient non-tax characteristics of a LLC are limited  
          liability for its owners (as in a corporation) and freedom to  








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          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  
          profits, and on the increased value of the property when the  
          property is sold or the corporation is liquidated.  LLCs avoid  
          taxation of the entity.  In addition, because the LLC usually  
          elects to be treated as a partnership for income tax purposes,  
          the income, gains, losses, deductions, and credits of the LLC  
          generally will flow through to its members for reporting on  
          their individual tax returns, with the distribution of that  
          income depending on the terms of the LLC agreement, not  
          necessarily the ownership interest of the individual members.  

          There appears to be no necessary relationship between allocation  
          of management rights and profits among the owners of an LLC.  A  
          large owner may have little or no control over the company,  
          while profits could be apportioned to LLC members who have the  
          least tax exposure. 
          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.  

          According to the sponsor, because of taxation and other  
          considerations formation of a new business, or conversion of an  
          existing business, as a LLC under this bill is expected to be  
          attractive primarily to large companies.  This calculation is  
          shared by the Landscape Contractors Association which has  
          withdrawn its prior support of the bill (it is now neutral)  
          because the bill is predicted to be of value mostly for big  
          companies.

          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 a relatively modest $800 annual LLC tax, similar  
          to the minimum tax paid by "S" corporations.  In addition to the  








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          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.  These fees appear to be not as  
          progressive as the corporate or personal tax rates.  It is not  
          clear whether these minimum taxes and fees apply to both  
          domestic and foreign LLCs, both of which would be eligible to  
          obtain a contractor's license under the bill.  

          According to the CSLB, there are currently over 70,000 corporate  
          licensees.  It is not known what proportion of them would  
          restructure as LLCs under this bill, although the sponsors  
          indicate that it is the largest companies that will be most  
          likely to do so.  Because the bill has not been referred to the  
          Revenue and Taxation Committee it is unknown whether the LLC  
          fees these entities would pay in lieu of taxes would be a net  
          loss or gain for state revenues.  However, the bill will be  
          referred to the Appropriations Committee which may be able to  
          assess these issues.  

          Until LLCs were first authorized 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  
          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.   








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          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).

           Liability Limits Balanced By New Wage Bond For Workers.   The  
          limited liability and more desirable tax treatment of LLCs, and  
          the ease by which LLCs can be created, caused some labor groups  
          concerns that a large number of construction companies will  
          convert to LLC status, which could create new obstacles to  
          recovery of wages and benefits.  The author has responded to  
          these concerns by amending the bill to require that each LLC  
          that obtains a license must obtain a bond in the amount of  
          $100,000 for the benefit of any employee damaged by his or her  
          employer's failure to pay wages, interest on wages, or fringe  
          benefits as an additional safeguard for workers employed by or  
          contracted to work for a limited liability company.  If the LLC  
          is a party to a collective bargaining agreement, this bond must  
          also cover welfare fund contributions, pension fund  
          contributions and apprentice program contributions.  

          It may be asked whether the adoption of a uniform bond  
          requirement for all LLCs, rather than a scaled amount based on  
          size, 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., last year's successful SB 43 (Alquist)  
          provided that specified design-build contracts may be required  
          to provide a payment bond of not less than one-half of the  
          contract price or three hundred million dollars ($300,000,000),  
          whichever is less.  Supporters of this bill believe that a  
          $100,000 bond requirement is not overly burdensome because only  
          large companies are likely to take advantage of the bill in any  
          event.

          All other potential claimants seeking losses or damages against  
          the company, including homeowners and persons injured by an LLC  
          contractor's wrongdoing, would be limited to seeking relief  
          under the existing contractor's bond.  Under existing law, all  
          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 person whose family home is damaged as the result  
          of a violation under a homeowner improvement contract.  The  








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          aggregate liability of a surety on a claim for wages and fringe  
          benefits brought against either bond may not exceed $4,000.  If  
          any such bond 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.  Under this bill,  
          individual qualifying members of an LLC would be relieved of  
          this bond requirements if the individual owns 10% or more of the  
          LLC.

           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 LLC 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).)

          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  








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          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.)
                                                                          
          This bill would make construction contactors the first exception  
          to the rule.  If the bill becomes law it should be anticipated  
          that other licensees will come forward with similar requests.   
          However, each exception should be examined independently.

          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 Unsuccessful Legislative Proposals To Authorize LLCs To  
          Engage In Licensed Activities.   This bill would authorize the  
          Contractors State License Board to issue a license to provide  
          construction services to an LLC that meets requirements provided  
          in the bill.  In 2008 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 Judiciary Committee.  









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          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 session, 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 a LLC providing those services.  

           Liability Insurance Required Based On Number of LLC Members,  
          Rather Than Size of Company.   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.  

          It might be noted that the number of LLC members is a highly  
          imprecise measure for assessing potential liability exposure  
          because a large construction company organized as an LLC may  
          have only a few owners.  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.  

           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  








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          substantially higher.  Supporters of this bill believe that the  
          bond required by this bill will ensure that any licensed LLC  
          will have substantial assets.

          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.

          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).









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           Potential To Pierce Veil Of LLCs As With Corporations.   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  
          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 or others.  SB 392 would remove  
          this uncertainty by noting that it is the intent of the  
          Legislature that this doctrine should apply to LLCs, and by  
          specifying that when the LLC's license has been suspended  
          members are liable for up to $1,000,000 in damages during that  
          period.

          This measure states the Legislature's intention that an  
          aggrieved person may 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.   
          These cases hold 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.  Because there is not yet comparable case  
          authority under California law, the bill provides an added  
          precaution in the form of a $100,000 wage bond for the benefit  
          of workers who might otherwise be without sufficient protection.

           Author's Technical Amendments.   In order to correct drafting  
          errors, the author appropriately proposes to amend the bill as  
          follows:

          Amend Section 1 so that it reads as follows:

           (d)  Construction contractors have been allowed to  be licensed   
          operate as corporations, and to be designated as an "S" or "C"  
          corporation for many years, with well-established case law  
          regarding the ability to pierce the corporate veil.  It is the  








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          intent of the Legislature that this doctrine shall also apply to  
          limited liability companies.  Because there is not yet case law  
          establishing this principle in California, the  (e) An  additional  
          one-hundred-thousand-dollar ($100,000) bond requirement for the  
          benefit of paying wages and fringe benefits will ensure that  
          workers are protected despite  in  the absence of case law dealing  
          with limited liability corporations  , specifically on the issue  
          of piercing the corporate veil.
           
          Replace the current language of section 43 with the following:  
          The Contractors State License Board shall begin processing  
          applications for licensure from limited liability companies,  
          pursuant to Chapter 9 of Division 3 of the Business and  
          Professions Code as amended by this act, no later than January  
          1, 2012.

          The author and sponsors acknowledge that the current version of  
          the bill contains additional drafting errors, including  
          ambiguous and inconsistent usage of the undefined term  
          "responsible managing manager."  The sponsor indicates that the  
          term is intended to cover "responsible managing employees," an  
          existing defined term in the contractors licensing statute.   
          However, the terms are not used consistently, and there appear  
          to be various omissions.  The author and sponsor have committed  
          to work with the Committee to address these and other issues as  
          the bill moves forward.



           REGISTERED SUPPORT / OPPOSITION  :

           Support 
           
          Associated General Contractors of California (co-sponsor)
          Associated General Contractors of San Diego (co-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
          State Building & Construction Trades Council
           








                                                                 SB 392
                                                                  Page  15

            Opposition (as amended)
           
          None on file

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