BILL ANALYSIS ----------------------------------------------------------------------- |Hearing Date:April 5, 2010 |Bill No:SB | | |1008 | ----------------------------------------------------------------------- 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 SB 1008 Page 2 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 SB 1008 Page 3 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 SB 1008 Page 4 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 SB 1008 Page 5 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, SB 1008 Page 6 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 SB 1008 Page 7