BILL ANALYSIS SB 392 Page 1 SENATE THIRD READING SB 392 (Florez) As Amended June 23, 2010 Majority vote SENATE VOTE :36-0 BUSINESS & PROFESSIONS 10-0 JUDICIARY 10-0 ----------------------------------------------------------------- |Ayes:|Hayashi, Emmerson, |Ayes:|Feuer, Tran, Brownley, | | |Conway, Eng, | |Evans, Hagman, Jones, | | |Hernandez, Nava, John A. | |Knight, Monning, Nava, | | |Perez, | |Huffman | | |Ruskin, Smyth, Hill | | | |-----+--------------------------+-----+--------------------------| | | | | | ----------------------------------------------------------------- APPROPRIATIONS 17-0 ----------------------------------------------------------------- |Ayes:|Fuentes, Conway, | | | | |Bradford, | | | | |Charles Calderon, Coto, | | | | |Davis, | | | | |De Leon, Gatto, Hall, | | | | |Harkey, Miller, Nielsen, | | | | |Norby, Skinner, Solorio, | | | | |Torlakson, Torrico | | | |-----+--------------------------+-----+--------------------------| | | | | | ----------------------------------------------------------------- SUMMARY : Allows licensed contractors to organize their company under the laws of a limited liability corporation (LLC). 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. SB 392 Page 2 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 with at least one of the following: a) The total aggregate limit of liability under the policy or policies of insurance for a limited liability company that employs five or fewer licensed persons shall not be less than $1 million dollars, and for a LLC that employs more than five licensees rendering professional services on behalf of the company, an additional $100,000 of insurance shall be obtained for each licensee except that the maximum amount of insurance is not required to exceed $5 million dollars in any one designated period. Defines "designated period" to mean a policy year or period less than 12 months; b) Maintain in trust or bank escrow, cash, bank certificates of deposit, United States Treasury obligations, bank letters of credit, or bonds of insurance or surety companies as security for payment of liabilities imposed by law for damages arising out of all claims. The maximum amount of security for a LLC that employing up to five licensed persons shall not be less than $1 million. For each additional licensee employed beyond five licensees, an additional $100,000 of security shall be obtained up a maximum of $5 million; c) At the time of licensing, a LLC shall file with the registrar all necessary information and documentation demonstrating compliance with the financial security requirements; and, d) If the security requirements of this section are satisfied wholly, or in part, with an insurance policy, then 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. SB 392 Page 3 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 suspension, for any act or contract where a license is required. 6)Requires that if a LLC license has been suspended or revoked, but stayed, the applicant or licensee must file or have on file a contractor's bond in a sum fixed by the registrar. The sum shall not be less than $15,000 or more than 10 times that amount. 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)Requires the Contractors State License Board (CSLB) to require as a condition precedent to the issuance, reissuance, reinstatement, reactivation, renewal, or continued valid use of a LLC license, that the applicant or licensee file or have on file a surety bond in the sum of $100,000, as specified. 10)Requires a LLC to obtain a Certificate of Liability Insurance, by an authorized agent or employee of the insurer, and requires the insurer to submit specified information to CSLB. 11)Authorizes CSLB to post on the Internet the name of the insurers providing the liability policies, the policy numbers, and the sum of each aggregate limit of liability, of active LLC licensees. 12)Requires CSLB to begin processing applications for licensure from LLCs by January 1, 2012. 13)Defines "members of the personnel of record" to mean every person listed in the records of the registrar as then associated with a licensee. SB 392 Page 4 14)Makes other technical and conforming changes. 15)Makes legislative findings and declarations. EXISTING LAW : 1)Provides for the licensure and regulation of contractors by the CSLB. 2)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. 3)Authorizes the issuance of a contractors' license to individual owners, co-partnerships, corporations, and joint ventures, and requires applicants to demonstrate degree of knowledge, experience, and qualifications. 4)Establishes the Beverly-Killea Limited Liability Company Act (LLC Act), to provide for LLCs to organize and conduct business in California, and allows foreign LLCs (any LLC organized outside of California) to register to conduct business in the state. 5)Provides that a LLC may engage in any lawful activity except banking, insurance, or trust company operations or the offering of professional services for which a license, certificate, or registration is required, unless expressly authorized. FISCAL EFFECT : According to the Assembly Appropriations Committee analysis: 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 SB 392 Page 5 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. COMMENTS : The Contractors Law was adopted in 1929, prior to the adoption of the LLC Act in 1994 that established LLCs. Currently, general contractors are allowed to organize as one of the following legal entities: sole proprietorship, general partnership (GP), limited partnership (LP), C-Corporation, and S-Corporation. Under current law, the CSLB may issue a license to an individual, a partnership, a corporation, or a joint venture that has met the requirements enumerated above. SB 392 would add a LLC to this list, with the CSLB treating a license applicant in almost all respects as a corporation. Thus, current law authorizes attorneys, accountants, and architects, all of whom provide professional services under the Business and Professions Code, to organize themselves as Limited Liability Partnerships (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. LLPs 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. Analysis Prepared by : Joanna Gin / B. & P. / (916) 319-3301 FN: 0005685