BILL ANALYSIS                                                                                                                                                                                                    







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        |Hearing Date:April 5, 2010         |Bill No:SB                         |
        |                                   |1008                               |
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                      SENATE COMMITTEE ON BUSINESS, PROFESSIONS 
                               AND ECONOMIC DEVELOPMENT
                         Senator Gloria Negrete McLeod, Chair

                         Bill No:        SB 1008Author:Padilla
                     As Amended:March 15, 2010          Fiscal:Yes

        
        SUBJECT:  Engineering and land surveying:  limited liability  
        partnerships.

        
        SUMMARY:  Authorizes engineers and land surveyors to operate within  
        their scope of licensure, and to conduct business as a limited  
        liability partnership (LLP) similar to that of architects, certified  
        public accountants and attorneys, and to be designated as a registered  
        LLP or a foreign LLP.

        Existing law, the Business and Professions Code:
        
        1) Licenses and regulates professional engineers and land surveyors by  
           the Board for Professional Engineers and Land Surveyors (Board)  
           within the Department of Consumer Affairs.

        2) Allows one or more civil engineer, electrical engineer, mechanical  
           engineer, or land surveyor to practice or offer to practice within  
           the scope of their registration as a sole proprietorship,  
           partnership, firm, or corporation if specified requirements are  
           met.

        Existing law, the Corporations Code:

        3) Provides for the formation of various types of legal entities,  
           including corporations, limited liability companies, partnerships,  
           limited partnerships, and limited liability partnerships.  

        4) Defines "foreign LLP" as a partnership, other than a limited  
           partnership, formed and governed by the laws of another  
           jurisdiction and requires it to also be licensed in California to  





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           engage in the practice of architecture, public accountancy, or the  
           practice of law.

        5) Defines "registered LLP" as a partnership, other than a limited  
           partnership, registered with the Secretary of State and governed by  
           the laws of California to engage in the practice of architecture,  
           public accountancy, or the practice of law.

        6) Sunsets as of January 1, 2012 statutes permitting architects to  
           form a foreign LLP or registered LLP for the practice of  
           architecture.

        7) Defines "professional LLP services" as the practice of  
           architecture, the practice of public accountancy, or the practice  
           of law.

        8) Requires a registered LLP or foreign LLP offering accountancy,  
           legal or architectural services to provide security as specified  
           against claims based upon acts, errors, or omissions arising out of  
           the practice of these professions.

        9) Provides as an option for providing security for claims that the  
           accountants, attorneys or architects who form an LLP maintain a  
           policy or policies of insurance against liability imposed on or  
           against it by law for damages arising out of claims with a total  
           aggregate limit of liability for partnerships with five or fewer  
           licensees of not less than $1,000,000, and for partnerships with  
           more than five licensees an additional $100,000 for each additional  
           licensee.  However, the maximum amount of insurance is not required  
           to exceed $5,000,000 for LLPs formed by accountants or architects  
           and $7,500,000 for LLPs formed by attorneys in any one designated  
           period.

        This bill:

        1) Authorizes a civil engineer, electrical engineer, mechanical  
           engineer, or land surveyor to practice or offer to practice within  
           the scope of their registration as an LLP.

        2) Authorizes a foreign LLP and a registered LLP to be formed for the  
           practice of engineering and the practice of land surveying, and  
           provides that engineers or land surveyors are not prohibited from  
           practicing or offering to practice, within the scope of their  
           registration, as an LLP.

        3) Imposes the security requirements on an LLP and foreign LLP  





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           providing engineering or land surveying services, equivalent to the  
           requirements for architects.  Specifically, an LLP offering  
           engineering or land surveying services must obtain either one, or  
           an aggregate of the following:  

           a)   A policy or policies of insurance against liability imposed on  
             or against it by law for damages arising out of claims in an  
             amount for each claim and in the annual aggregate of at least  
             $1,000,000.  The policy or policies may be issued on a  
             claims-made or occurrence basis as specified.

           b)   Security for payment of liabilities in trust or bank escrow,  
             cash, bank certificates of deposit, United States Treasury  
             obligations, bank letter of credit, or bonds of insurance or  
             surety companies in an amount of at least one million dollars  
             ($1,000,000).

        1) Provides that, in lieu of the requirement specified in #3) above,  
           an LLP may file a confirmation with the California Secretary of  
           State that the LLP has a net worth equal to or greater than  
           $10,000,000.

        2) Provides that each partner, except for a partnership that satisfies  
           #4) above, by virtue of his or her status as a partner, is liable  
           for the difference should the LLP's insurance fall short of the  
           minimum insurance requirements.

        3) Strikes obsolete provisions out of the law relating to LLP's, and  
           makes technical and conforming changes.


        FISCAL EFFECT:  Unknown.  Legislative Counsel has keyed this bill as  
        "fiscal."

        
        COMMENTS:
        
        1. Purpose.  This bill is sponsored by the  American Council of  
           Engineering Companies  (ACEC) to extend the authority to arrange as  
           a limited liability partnership to engineering and land surveying  
           firms.

        According to the Author "Extending LLP authority to engineering and  
           land surveying firms addresses a quirk in existing law which allows  
           architects, attorneys, and accountants to organize as a LLP but not  
           engineers or land surveyors.  LLP's have been common practice in  





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           California for lawyers, accountants and architects." 

        2. Background.  An LLP is a hybrid of a corporation and a general  
           partnership, which offers its owners limited liability and  
           pass-through income tax treatment, yet can be run without the  
           formalities generally required of a corporation.  The  
           distinguishing characteristic of an LLP from a corporate or general  
           partnership is that in an action regarding the negligence or  
           wrongful act of a partner, a plaintiff can enforce a judgment  
           against the partnership assets and the personal assets of the  
           negligent partner.  The personal assets of the non-negligent  
           partners are not available to satisfy the judgment.  To mitigate  
           the public's concerns over the limitation of liability, LLPs  
           traditionally must maintain a high level of professional liability  
           insurance. 

        3. Limited Liability Companies, Limited Liability Partnerships and  
           Professional Services.  Under the Beverly-Killea Limited Liability  
           Company (LLC) Act, a foreign or domestic limited liability company  
           is prohibited 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.

        The rationale for the exclusion was 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 or limited  
           liability partnership (LLP) and thus become potentially  
           judgment-proof. 

        4. Related Legislation.   SB 392  (Flores) of 2009  authorizes the  
           issuance of a contractor's license to a limited liability company  
           (LLC); mirrors the provisions regulating contractor's licenses  
           issued to a corporation and applies them to contractor's licenses  
           issued to LLCs; requires an LLC to carry $1,000,000 in liability  
           insurance or in a trust or escrow account.  That bill is awaiting  
           hearing in the Assembly Judiciary Committee.

         AB 180  (Horton) of 2005 was nearly identical to SB 1008; however, it  
           established a January 1, 2009 sunset date on its provisions.  That  
           bill passed this Committee 4-0.  The bill was ultimately amended to  
           become another bill. 

         AB 1265  (Benoit), in the 2003-2004 Session, would have permitted  
           professional engineers and land surveyors to organize as an LLP and  





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           would have required the same insurance liability coverage as that  
           of architects.  This bill was passed out of this Committee with a  
           7-0 vote.  However, it was held in the Senate Judiciary Committee.   
           The major concern expressed by the Judiciary Committee was that the  
           proposed levels of liability insurance may not be adequate to cover  
           certain claims against engineer or land surveyors.

         AB 2914  (Chaper 426, Statutes of 2006) further extended the sunset  
           date for architects to organize as LLPs to January 1, 2012.

         AB 1596  (Shelley, Chapter 595, Statutes of 2001) extended the sunset  
           date of statutes permitting architects to organize as LLPs to  
           January 1, 2007.

         AB 469  (Cardoza, Chapter 504, Statutes of 1998), permitted architects  
           to form an LLP provided the partnership had between $500,000 and $5  
           million in insurance depending on the number of partners in the  
           LLP; also provided that the provisions of AB 469 would sunset on  
           January 1, 2002.

         SB 513  (Calderon, Chapter 679, Statutes of 1995) permitted accountants  
           and attorneys to form an LLP.  Accountants forming an LLP were  
           required to have between $500,000 and $5 million in insurance, and  
           attorneys were required to have between $500,000 and $7.5 million  
           in insurance, depending upon the number of partners in the LLP.

        5. Arguments in Support.  The Sponsor of this bill ACEC, along with  
           the  California Business Properties Association  and the  California  
           Chamber of Commerce who support this measure, argue that the  
           authority to organize as an LLP under this bill will offer unique  
           project delivery opportunities and allow for the creation of  
           specialty partnerships to deliver infrastructure projects in  
           California.  They state the bill will encourage the expansion of  
           business practices while bringing California into parity with the  
           vast majority of other states which allow professional services to  
           be engaged in these business structures.  The proponents further  
           suggest, "As California attempts to claw its way out of the worst  
           recession in decades, providing options to business makes sense.   
           Allowing engineering and land surveying firms the option to  
           structure as LLP's will provide additional flexibility that will  
           encourage business expansion in some instances, while boosting  
           project delivery options."

         6. Policy Issue  :  Should there be a five-year sunset date placed on  
           the provisions which allow for engineers and land surveyors to form  
           LLPs similar to that placed on architects?  AB 469, Chapter 504,  





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           Statutes of 1998, permitted architects to form an LLP, provided  
           that the partnership had between $500,000 and $5 million in  
           insurance depending on the number of partners in the LLP.  It also  
           provided that the provisions allowing architects to form LLPs would  
           sunset on January 1, 2002.  AB 1596, Chapter 595, Statutes of 2001,  
           extended the sunset date of statutes permitting architects to form  
           LLPs to January 1, 2007.  This bill was originally attempting to  
           eliminate the January 1, 2002 sunset date entirely.  However, when  
           this bill was heard in the Senate Judiciary Committee, there was  
           concern about the claims data presented and whether it accurately  
           reflected what might be current and future claims regarding  
           judgments assessed against architects for professional negligence.   
           Because of this incomplete data, it was agreed to grant an  
           extension of the sunset date for five years, to January 1, 2007.   
           AB 2914 (Chapter 426, Statutes of 2006) further extended the sunset  
           date for five years, to January 1, 2012.

        Staff recommends that if a five-year sunset date is to be considered,  
           that the bill be amended to include a January 1, 2016 sunset date  
           on the authority for engineers and Land surveyors to form LLPs.  
        
             On page 10, between lines 36 and 37, insert:
             (20)  The provision of the practice of engineering and the  
             practice of land surveying as a professional limited liability  
             partnership service permitted by this section shall extend only  
             until January 1, 2016.
        

         NOTE  :  Double-referral to Judiciary Committee (second.)
        

        SUPPORT AND OPPOSITION:
        
         Support:   

        American Council of Engineering Companies (Sponsor)
        California Business Properties Association
        California Chamber of Commerce

         Opposition:  None received as of March 30, 2010



        Consultant:G. V. Ayers







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