BILL ANALYSIS ------------------------------------------------------------ |SENATE RULES COMMITTEE | SB 1008| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ THIRD READING Bill No: SB 1008 Author: Padilla (D) Amended: 4/28/10 Vote: 21 SENATE BUSINESS, PROF. & ECON. DEV. COMMITTEE : 7-0, 4/5/10 AYES: Negrete McLeod, Aanestad, Calderon, Correa, Oropeza, Walters, Yee NO VOTE RECORDED: Wyland, Florez SENATE JUDICIARY COMMITTEE : 4-0, 4/20/10 AYES: Corbett, Harman, Hancock, Leno NO VOTE RECORDED: Walters SENATE APPROPRIATIONS COMMITTEE : Senate Rule 28.8 SUBJECT : Engineering and land surveying: limited liability partnerships SOURCE : American Council of Engineering Companies DIGEST : This bill 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. ANALYSIS : CONTINUED SB 1008 Page 2 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 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, SB 1008 Page 3 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 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 $1,500,000. The policy or policies may be issued on a claims-made or occurrence basis as specified. SB 1008 Page 4 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 $1,500,000. 4. Provides that, in lieu of the requirement specified in #3 above, an LLP may file a confirmation with the Secretary of State that the LLP has a net worth equal to or greater than $10,000,000. 5. Provides that each partner, except for a partnership that satisfies #4 above, by virtue of his/her status as a partner, is liable for the difference should the LLP's insurance fall short of the minimum insurance requirements. 6. Strikes obsolete provisions out of the law relating to LLPs, and makes technical and conforming changes. 7. Sunsets the provisions of this bill on January 1, 2016. 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. Limited Liability Companies (LLCs), LLPs and Professional Services . Under the Beverly-Killea Limited Liability Company Act, a foreign or domestic limited liability company is prohibited from rendering professional services in this state unless expressly authorized under applicable SB 1008 Page 5 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 LLP and thus become potentially judgment-proof. FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes Local: No SUPPORT : (Verified 5/10/10) American Council of Engineering Companies (source) American GI Forum of California Asian Business Association California Business Properties Association California Chamber of Commerce California Land Surveyors Association Century Diversified, Inc. Golden State Management Services Greater Los Angeles Chapter of the Society of Hispanic Professional Engineers, Inc. Hispanic Contractors Association Latino Business Chamber of Greater Los Angeles W2 Design, Inc. ARGUMENTS IN SUPPORT : The bill's sponsor, the American Council of Engineering Companies, along with the California Business Properties Association and the California Chamber of Commerce who support this bill, 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 SB 1008 Page 6 option to structure as LLPs will provide additional flexibility that will encourage business expansion in some instances, while boosting project delivery options." JJA:mw 5/11/10 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END ****