BILL ANALYSIS                                                                                                                                                                                                    



                                                                       



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          |SENATE RULES COMMITTEE            |                   SB 392|
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                              UNFINISHED BUSINESS


          Bill No:  SB 392
          Author:   Florez (D)
          Amended:  6/23/10
          Vote:     21

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

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

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

           SENATE FLOOR  :  36-0, 5/18/09 (Consent)
          AYES:  Aanestad, Alquist, Ashburn, Benoit, Calderon,  
            Cogdill, Corbett, Correa, Cox, Denham, DeSaulnier,  
            Ducheny, Dutton, Hancock, Harman, Hollingsworth, Huff,  
            Kehoe, Leno, Liu, Lowenthal, Maldonado, Negrete McLeod,  
            Oropeza, Padilla, Pavley, Runner, Simitian, Steinberg,  
            Strickland, Walters, Wiggins, Wolk, Wright, Wyland, Yee
          NO VOTE RECORDED:  Cedillo, Florez, Romero, Vacancy

           ASSEMBLY FLOOR  :  75-0, 8/26/10 - See last page for vote


           SUBJECT  :    Limited liability companies:  licensed  
          contractors
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           SOURCE  :     Associated General Contractors of California 
                      Associated General Contractors - San Diego


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

           Assembly Amendments  require the LLCs authorized by this  
          bill to maintain a policy or policies of insurance against  
          liability imposed on or against it for damages arising out  
          of claims, and require, as a condition precedent to the  
          issuance, reissuance, reinstatement, reactivation, renewal,  
          or continued valid use of a limited liability company  
          license, that the applicant or licensee file or have on  
          file a surety bond in the sum of $100,000 for damages  
          arising out of specified claims of employees, and make  
          other technical changes.

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

          Existing law defines "professional services" as "any type  
          of professional services which may be lawfully rendered  
          only pursuant to a license, certification, or registration  
          authorized by the Business and Professions Code, the  
          Chiropractic Act, or the Osteopathic Act." (Section  
          13401(a) of the Corporations Code)  Only attorneys,  
          accountants, and architects have been authorized to render  

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          professional services as limited liability entities in  
          California.

          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 an  
             LLC, and adds license requirements that mirror those of  
             a corporation. 

          4. Requires an 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, and for an  
                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 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 an  
                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. 


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             C.    At the time of licensing, an LLC shall file with  
                the registrar all necessary information and  
                documentation demonstrating compliance with the  
                financial security requirements.

             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. 

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

          8. Requires an 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 an 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 an LLC to obtain a Certificate of Liability  

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             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. 

          14.Makes other technical and conforming changes. 

          15.Makes legislative findings and declarations. 

           Background  

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

          Until the creation of LLCs, the limited partnership and the  
          subchapter S corporation were the primary forms of business  
          entity used to achieve the tax status and limited liability  
          features now offered by the LLC.  Each of those forms has  

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          its drawbacks, but the LLC can provide the advantages of  
          both without the disadvantages of either.

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

          Although an S corporation allows pass-through tax treatment  
          and limited liability for all owners, S corporation status  
          limits the parties' flexibility in structuring their  
          financial arrangements because of the requirements that the  
          corporation have no more than one class of stock and that  
          items of income, gain, loss, deduction, or credit be  
          distributed among shareholders on a pro rata basis.   
          Furthermore, only individuals, estates, certain types of  
          trusts, and certain tax-exempt organizations are permitted  
          to be S corporation shareholders, and an S corporation will  
          lose its pass-through tax treatment if an ineligible entity  
          becomes a shareholder.

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

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

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

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

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

           Prior Legislation
           
          SB 141 (Beverly), Chapter 57, Statutes of 1995, would have  

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

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

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

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

          According to the Assembly Appropriations Committee, 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.  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. 

           SUPPORT  :   (Verified  8/25/10)

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

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          Golden State Builders Exchange
          Marin Builders Association
          State Building and Construction Trades Council


           ASSEMBLY FLOOR  : 
          AYES:  Adams, Ammiano, Anderson, Arambula, Bass, Beall,  
            Bill Berryhill, Tom Berryhill, Block, Blumenfield,  
            Bradford, Brownley, Buchanan, Caballero, Charles  
            Calderon, Carter, Chesbro, Conway, Cook, Coto, De La  
            Torre, De Leon, DeVore, Eng, Evans, Feuer, Fletcher,  
            Fong, Fuentes, Fuller, Furutani, Gaines, Galgiani,  
            Garrick, Gatto, Gilmore, Hagman, Hall, Harkey, Hayashi,  
            Hernandez, Hill, Huber, Huffman, Jeffries, Jones, Knight,  
            Lieu, Logue, Bonnie Lowenthal, Ma, Mendoza, Miller,  
            Monning, Nava, Nestande, Niello, Nielsen, V. Manuel  
            Perez, Portantino, Ruskin, Salas, Saldana, Silva,  
            Skinner, Smyth, Solorio, Audra Strickland, Swanson,  
            Torlakson, Torres, Torrico, Villines, Yamada, John A.  
            Perez
          NO VOTE RECORDED:  Davis, Norby, Tran, Vacancy, Vacancy


          JJA:mw  8/27/10   Senate Floor Analyses 

                         SUPPORT/OPPOSITION:  SEE ABOVE

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