BILL ANALYSIS                                                                                                                                                                                                    

                                                                  SB 392
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          Date of Hearing:   August 4, 2010

                                Felipe Fuentes, Chair

                    SB 392 (Florez) - As Amended:  June 23, 2010 

          Policy Committee:                              JudiciaryVote:10  
          - 0 
                        Business and Professions              10 - 0 

          Urgency:     No                   State Mandated Local Program:  
          Yes    Reimbursable:              No


          This bill authorizes the State Contractors License Board (CSLB)  
          to issue a contractors license to a limited liability company  
          (LLC) if the LLC meets other requirements such as bonding,  
          solvency, and liability insurance.  

           FISCAL EFFECT  

          1)The Franchise Tax Board estimates that the contractors  
            establishing LLCs and paying the $800 annual LLC tax would  
            result in an additional $8.4 million in revenue for 2011-12,  
            growing to $11 million in 2012-13. 

          2)The CSLB anticipates between 500 and 700 initial applications  
            for the new LLC license category. Workload and automation  
            costs associated with these applications and creating the new  
            category would be approximately $65,000 per year for the first  
            two years. The revenue increase associated with the new  
            licenses would more than offset the costs. 


           1)Purpose  . The intent of this legislation is to offer  
            California's licensed contractors the same advantages as other  
            industries in California and contractors in other states by  
            allowing them to form an LLC. Among the advantages are the  
            fact that the LLC provides liability protection for the  
            personal assets of the owners and allows flexibility for  
            distributing profits and losses. 


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           2)Limited Liability Company  . 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 primary non-tax 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, 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 of the gains and losses will depend on the terms  
            of the LLC agreement, not necessarily the ownership interest  
            of the individual members.  

            The ability of LLCs to allocate income, gains, losses, and  
            other items disproportionately among owners allows LLCs to be  
            arranged in such a way as to create a more desirable tax  
            treatment than corporations or other forms of business  

           3)Related Legislation  . SB 1008 (Padilla) authorizes licensed  
            engineers and land surveyors to organize and operate as  
            limited liability partnerships, provided that they provide  
            security for claims against the LLP by maintaining specified  
            levels of insurance liability coverage, cash reserves in  
            trust, and minimum net worth. That bill is currently pending  
            in this committee. 

           Analysis Prepared by  :    Julie Salley-Gray / APPR. / (916)  


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