BILL ANALYSIS                                                                                                                                                                                                    



                                                                  SB 1008
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          SENATE THIRD READING
          SB 1008 (Padilla)
          As Amended  August 2, 2010
          Majority vote 

           SENATE VOTE  :33-0  
          
           BUSINESS & PROFESSIONS     11-0 JUDICIARY           10-0        
           
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          |Ayes:|Hayashi, Conway, Eng,     |Ayes:|Feuer, Tran, Brownley,    |
          |     |Hernandez, Hill, Ma,      |     |Evans, Hagman, Huffman,   |
          |     |Nava, Niello, Ruskin,     |     |Jones, Knight, Monning,   |
          |     |Smyth, Cook               |     |Saldana                   |
          |-----+--------------------------+-----+--------------------------|
          |     |                          |     |                          |
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           APPROPRIATIONS      17-0                                        
          
           ----------------------------------------------------------------- 
          |Ayes:|Fuentes, Conway,          |     |                          |
          |     |Bradford,                 |     |                          |
          |     |Huffman, Coto, Davis, De  |     |                          |
          |     |Leon, Gatto, Hall,        |     |                          |
          |     |Harkey, Miller, Nielsen,  |     |                          |
          |     |Norby, Skinner, Solorio,  |     |                          |
          |     |Torlakson, Torrico        |     |                          |
          |-----+--------------------------+-----+--------------------------|
          |     |                          |     |                          |
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           SUMMARY  :  Authorizes engineers and land surveyors operating  
          within their scope of licensure 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.  Specifically,  this bill  :   
           

          1)Authorizes a civil engineer, electrical engineer, mechanical  
            engineer, or land surveyor to practice or offer to practice as  
            an LLP within the scope of his or her licensure if certain  
            requirements are met.

          2)Authorizes a foreign LLP and a registered LLP to be formed for  
            the practice of engineering and the practice of land  








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            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 $2 million.  The policy or policies may be issued  
               on a claims-made or occurrence basis as specified; or,

        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 $2 million.  

          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 million.

          5)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.

          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.

           EXISTING LAW  :

          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,  








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            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.

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

          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, 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  
            million, 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 million for LLPs formed by accountants or architects  








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            and $7.5 million for LLPs formed by attorneys in any one  
            designated period.

           FISCAL EFFECT  :   According to the Assembly Appropriations  
          Committee analysis:

          1)The Franchise Tax Board estimates this legislation will result  
            in a loss of tax revenue of approximately $100,000 in 2010-11,  
            growing to $2.5 million per year in future years, because  
            current S corporations and C corporations would convert to  
            LLPs due to the tax advantages. 

          2)The licensing board for engineers and land surveyors does not  
            anticipate that this legislation will have any workload impact  
            for the board.

           COMMENTS  :  According to the author's office, "Allowing  
          engineering and land surveying firms the option to structure as  
          [LLPs] will grant parity with related design professionals  
          (architects) who can currently form [LLPs].

          "The ability to form [LLPs] will allow engineering and land  
          surveying firms to combine with firms with complimentary  
          expertise in order to better compete for projects.  As the  
          needed infrastructure projects become more complex, the  
          flexibility of design and construction firms to adapt is key in  
          being able to effectively deliver for their clients.

          "Currently, 14 other states (New York, Nevada, Ohio, Oklahoma,  
          Missouri, Massachusetts, Kansas, Tennessee, Virginia, Illinois,  
          Connecticut, Delaware, Washington and Wisconsin) allow the  
          formation of [LLPs] by engineering and land surveying firms."

          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  








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          traditionally must maintain a high level of professional  
          liability insurance.
           
          Under the Beverly-Killea LLC Act, a foreign or domestic LLC 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 LLP and thus become potentially judgment-proof.


           Analysis Prepared by  :    Rebecca May / B.,P. & C.P. / (916)  
          319-3301 

                                                                FN: 0005940