BILL ANALYSIS SB 1008 Page 1 SENATE THIRD READING SB 1008 (Padilla) As Amended August 2, 2010 Majority vote SENATE VOTE :33-0 BUSINESS & PROFESSIONS 11-0 JUDICIARY 10-0 ----------------------------------------------------------------- |Ayes:|Hayashi, Conway, Eng, |Ayes:|Feuer, Tran, Brownley, | | |Hernandez, Hill, Ma, | |Evans, Hagman, Huffman, | | |Nava, Niello, Ruskin, | |Jones, Knight, Monning, | | |Smyth, Cook | |Saldana | |-----+--------------------------+-----+--------------------------| | | | | | ----------------------------------------------------------------- APPROPRIATIONS 17-0 ----------------------------------------------------------------- |Ayes:|Fuentes, Conway, | | | | |Bradford, | | | | |Huffman, Coto, Davis, De | | | | |Leon, Gatto, Hall, | | | | |Harkey, Miller, Nielsen, | | | | |Norby, Skinner, Solorio, | | | | |Torlakson, Torrico | | | |-----+--------------------------+-----+--------------------------| | | | | | ----------------------------------------------------------------- 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 SB 1008 Page 2 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, SB 1008 Page 3 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 SB 1008 Page 4 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 SB 1008 Page 5 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