BILL ANALYSIS Ó
SB 1077
Page 1
Date of Hearing: June 26, 2012
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
SB 1077 (Price) - As Amended: May 1, 2012
As Proposed to be Amended
SENATE VOTE : 38-0
SUBJECT : Alarm Companies: Limited Liability Companies
KEY ISSUES :
1)Should an alarm company be permitted TO form as a limited
liability company?
2)Should the Bureau of Security and Investigative Services,
which regulates licensed alarm companies, be permitted to cite
and fine unlicensed alarm companies when they act as AN alarm
company?
FISCAL EFFECT : As currently in print this bill is keyed fiscal.
SYNOPSIS
This bill would authorize a licensed alarm company to organize
as a limited liability company (LCC). An LLC is a business form
that combines the limited liability benefits of a corporation
with the tax benefits of a proprietorship or partnership.
However, existing law generally prohibits businesses that render
"professional services" from forming an LLC. Although the
Legislature was primarily concerned with lawyers, accountants,
and medical providers when it created the restriction, the law
defines "professional services" as any services requiring a
license or certification under the Business & Professions Code.
The author claims that this definition of "professional
services" sweeps more broadly than necessary given the intent of
the exclusion. Partly in recognition of this concern, in recent
years the Legislature has created exemptions that allow certain
businesses to organize as LLCs, even though they require
licenses or certification. This bill would continue this
legislative trend by permitting an alarm service company,
licensed under the Alarm Company Act, to form as an LLC. This
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bill would also permit the bureau that oversees licensed alarm
companies to cite and fine unlicensed alarm companies and to
issue probationary licenses to disciplined licensees. (As
reflected in the analysis, the author will take an amendment to
authorize the probationary licenses in this Committee.) The
bill is sponsored by the California Alarm Association and
supported by the Los Angeles County District Attorney's Office.
There is no known opposition to this bill, which has not
received any negative votes in any floor or committee vote.
SUMMARY : Permits, until January 1, 2016, an alarm company to
form as a limited liability company, so long as it maintains an
adequate level of liability insurance. Specifically, this bill :
1)Allows a licensed alarm company to be organized as a limited
liability company (LCC) and makes conforming changes to the
Alarm Company Act.
2)Requires an alarm company that organizes as an LCC to maintain
a minimum amount of liability insurance and submit specified
information and documentation to the Bureau of Security and
Investigative Services (BSIS), and specifies that failure to
do so will result in a suspension of the license and impose
members to liability for damages to third parties, as
specified.
3)Permits a licensed alarm company, with consent from the BSIS,
to assign its license to another business entity so long as
the owners of the assignor own all of the assignee immediately
after the assignment.
4)Permits the BSIS to cite and fine an unlicensed alarm company
that is acting in the capacity of a licensee, or who
advertises for the purpose of soliciting business as an alarm
company operator.
5)Permits the Alarm Company Operator Disciplinary Review
Committee, within the BSIS, to grant, amend, or modify a
probationary license to disciplined licensees, as specified.
EXISTING LAW :
1)Permits a company to organize as an LCC under the
Beverley-Killea Limited Liability Company Act, but prohibits a
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limited liability company from rendering professional
services, as defined, unless expressly authorized to do so by
a provision of the Business and Professions Code.
(Corporations Code Section 17375.)
2)Defines "professional service," for purposes of the above, to
mean any services that may only be lawfully rendered pursuant
to a license, certification, or registration authorized by the
Business and Professions Code, the Chiropractic Act, or the
Osteopathic Act. (Corporations Code Section 13401 (a).)
3)Provides, under the Alarm Company Act, for the licensure,
registration, and regulation of alarm company operators and
alarm agents by the Bureau of Security and Investigative
Services (BSIS), within the Department of Consumer Affairs
(DCA). Specifies that a "licensee" means a business entity,
whether an individual, partnership, or corporation. (Business
& Professions Code Section 7590.1.)
4)Authorizes the BSIS to issue a citation and fine to a licensed
alarm company for violations of the Alarm Company Act, as
specified. (Business & Professions Code Section 7591.9.)
5)Authorizes any board, bureau, or commission within the DCA to
establish a system for the issuance of citations and fines to
unlicensed persons if they act in the capacity of a licensee;
however, existing law does not currently permit BSIS to cite
or fine unlicensed alarm companies. (Business & Professions
Code Sections 125.9, 148.)
6)Prohibits an alarm company from transferring its license to
another person. (Business & Professions Code Section
7599.47.)
COMMENTS : A limited liability company (LLC) is a business form
that combines the limited liability benefits of a corporation
with the "pass through" tax benefits of a proprietorship or
business partnership. (That is, the members of an LLC are
generally only liable to third parties up to the amount of their
investment in the LCC, and, unlike a corporation, the LLC is not
subject to the so-called "double tax.") California first
recognized the LLC form with the enactment of the
Beverley-Killea Limited Liability Company Act in 1994. Prior to
that, business entities could form as so-called "S Corporations"
to obtain limited liability while avoiding all of the tax
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consequences of forming a corporation. Since 1994, the LLC has
apparently become the preferred option for businesses with
multiple owners who seek, for whatever reason, an alternative to
the corporate form or the business partnership. As discussed
below, the Beverley-Killea Act originally (and still does)
provide that its provisions shall not be construed to permit a
company that renders "professional services" to organize as an
LLC, unless a specific provision of the Business & Professions
(B&P) Code expressly authorizes it to do so. However, the
Legislature has subsequently amended the B&P Code to grant that
express authorization to certain contractors, private cemetery
operators, and repossessors. This bill would add alarm
companies to the list of licensed professional service companies
that may form an LLC.
Prohibition Against "Professional Services:" A provision of the
Beverley-Killea Act added in 1999 (SB 284, Chapter 1000, Stats.
of 1999) prevents any business that provides "professional
services" from forming an LLC, unless an express provision of
the Business & Professions Code authorizes it to do so. For
purposes of the Act, "professional services" has the same
meaning that it has in the Corporations Code: that is, any
business that requires possession of a license, certification,
or registration pursuant to the Business & Professions Code or
other specific statutory provision. The legislative history of
SB 284 says nothing about the rationale for excluding
"professional services," because it simply codified un-codified
language from the original 1994 legislation creating the
Beverley-Killea Act, SB 469. According to the Senate Judiciary
Committee Analysis of SB 469, however, the Act when originally
introduced contained a provision that would have allowed certain
professional practitioners, such as doctors, dentists, lawyers,
and accountants, to organize as a Professional Limited Liability
Companies (PLLC). However, this provision was opposed by the
California Trial Lawyers Association on the grounds that it
would have permitted those professionals to avoid liability for
their members' malpractice. As such, this provision was
eventually removed from the legislation and un-codified language
stated that nothing in Beverley-Killea would be construed to
permit companies providing "professional services" to form an
LLC. As noted above, this language was unceremoniously, and
without comment, codified as Corporations Code Section 17375 in
SB 284 (Chapter 1000, Stats. of 1999.)
Subsequent Exceptions to the "Professional Service" Prohibition :
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Although the rationale for excluding "professional services"
apparently focused on lawyers, accountants, and medical
providers, as finally codified the prohibition applied to any
business that rendered "professional servicers," which was in
turn defined as any business that required a license,
certification, or registration pursuant to the B&P Code, unless
a specific provision of the B&P Code provided otherwise. As
noted above, the Legislature has subsequently provided express
authorization to private cemetery operators (SB 1225, Chapter
114, Stats. of 2008); contractors licensed by the Contractors
State License Board (SB 392, Chapter 698, Stats. of 2010); and
repossession agencies (AB 1541, Chapter 505, Stats. of 1995.)
In addition to allowing these businesses to organize as LLCs,
the Legislature has also created an alternative to the LLC by
allowing certain professional service providers, namely lawyers,
accountants, engineers, surveyors, and architects, to form a
"limited liability partnership" or LLP. (Corporations Code
Sections 16954 et seq.) The LLP has essentially the same tax
advantages as an LLC and limits a partners' exposure for the
malpractice of other partners, so long as they are not involved
in the negligent conduct or do not supervise someone who
committed the negligent act. In short, the prohibition against
"professional service" companies forming LLCs has been
effectively breached by either providing express LLC
authorization to a handful of professional services in the B&P
Code, or by permitting other professional service providers to
obtain similar protections by forming an LLP. This bill follows
this trend by providing express authorization for alarm
companies to form LLCs.
Limited Liability, Insurance Requirements, and Sunset Provision :
Given that one of primary reasons for forming an LLC is to reap
the benefits limited liability (the other, to reap the tax
benefits, is of less concern to this Committee), it is essential
to ensure that limited liability does not prevent persons harmed
by the negligence of LLC members from recovering adequate
damages. As such, previous bills that have either authorized
professional service providers to form LLCs or LLPs have
required those businesses to maintain an adequate level of
liability insurance. In accord with this policy, the author
previously amended the bill to impose a liability insurance
requirement comparable to levels required of professionals who
organize as an LLP. In addition, as was the case with prior
legislation that permitted specific professional service
businesses to form LLCs, this bill also includes a sunset date
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of January 1, 2016. As with all sunsets, this will allow the
Legislature to revisit the issue and respond to any unintended
consequences and evaluate the adequacy of required liability
insurance levels.
Conforming change: Transferring a License: In addition to
permitting alarm companies to form LLCs, this bill also makes
related conforming changes. For example, existing law prohibits
an alarm company operator from transferring its license to
another person or entity. Technically, this provision could
prevent an alarm company that is presently organized as a
corporation or partnership, but then reorganizes as an LLC
pursuant to this bill, from transferring that license to the LLC
- which technically would be a different entity. This bill,
therefore, would allow an alarm company to transfer its license
to the new structure so long as the owners of previous entity
were the same as the owners of the new entity.
Regulating Unlicensed Alarm Companies and Issuing Probationary
Licenses to Disciplined Licensees : Finally, this bill gives
more authority to BSIS, the bureau within the DCA that regulates
alarm companies. First, while the BSIS presently has the right
to cite and fine licensed alarm companies, it has no authority
over unlicensed alarm companies. This means that the task of
dealing with businesses that fail to obtain a license falls to
local district attorneys. Second, this bill, as proposed to be
amended, would permit the Alarm Company Operator Disciplinary
Review to issue a probationary license to disciplined licensees
who have lost their regular licenses.
ARGUMENTS IN SUPPORT : According to the sponsor, the California
Alarm Association (CAA), "The first proposed change would allow
an alarm company to be a LLC. Under the BPC, there are several
professional businesses that are prohibited from becoming LLCs.
This prohibition stems from broad language in the BPC that was
originally targeted at keeping law firms and accounting firms
from becoming LLCs. CAA believes this language is outdated and
was adopted before many professional companies, such as alarm
companies, began organizing as LLCs. Forty-nine other states
allow alarm companies to organize as LLCs. Consumers will still
be able to sue alarm companies organized as a LLC for damages in
the rare cases where disputes arise."
"In addition," the author continues, this bill will "grant the
BSIS greater authority to cite and fine alarm companies
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operating without a license. Under current law, it is illegal
to operate an alarm company without a license issued by the
BSIS. Part of the licensing process is a thorough background
check on the owners and employees of the alarm company.
However, under current law, the BSIS lacks the direct authority
to regular unlicensed alarm companies? ÝThis bill] will provide
greater protection for consumers who may be victimized by
unscrupulous alarm companies operating without the proper
license."
According to the Los Angeles County District Attorney's Office,
"SB 1077 authorizes the BSIS to issue an alarm company operator
license to a LLC and requires the company to maintain specified
insurance, and failure Ýto do so] would subject the company to
suspension and damages. SB 1077 also authorizes the issuance of
a citation for acting in the capacity of a licensee without a
license, registration, permit, or certificate and against any
person who advertises for the purpose of soliciting business as
a company operator without a license."
Proposed Author Amendments : The author wishes to take the
following rather non-controversial amendments in this Committee.
The two sets of amendments, listed below, do two things: the
first set of amendments merely correct terminology that was
added in the May 1, 2012 amendments; the second set of
amendments authorize the Alarm Company Operator Disciplinary
Review Committee, within the BSIS, to issue probationary
licenses to disciplined licensees.
Amendment Set #1 :
- On page 20, line 21, strike out "members of the
personnel of record" and insert:
named as managing members pursuant to Section 7593.5 or 7599.32
- On page 20, line 25, strike out "members of the
personnel of record" and insert:
named as managing members pursuant to Section 7593.5 or 7599.32
- On page 20, line 27, strike out "personnel of
record" and insert:
named as managing members
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Amendment Set #2
- On page 14 between lines 15 and 16 insert:
SEC. 7. Section 7591.18 of the Business and Professions Code is
amended to read:
7591.18. (a) The Alarm Company Operator Disciplinary Review
Committee shall perform the following functions:
(1) Affirm, rescind, or modify , or grant a probationary
license for all appealed decisions concerning administrative
fines assessed by the bureau against alarm company operators or
their employees.
(2) Affirm, rescind, or modify , or grant a probationary
license for all appealed decisions concerning denial,
revocation, or suspension of licenses, and certificates,
registrations, or permits issued by the bureau, except denials
or suspensions ordered by the director in accordance with
Chapter 5 (commencing with Section 11500) of Division 3 of Title
2 of the Government Code.
(3) The Alarm Company Operator Disciplinary Review Committee
may grant a probationary license, certificate, registration, o
permit with respect to the appealed decisions described in
subdivision (a).
- On page 18, between lines 23 and 24, insert:
Section 7593.16 is added to the Business and Professions Code to
Read:
7593.16. (a) Notwithstanding any other provision of law, the
director may, in his or her sole discretion, grant a
probationary license to an applicant subject to terms and
conditions deemed appropriate by the director, including, but
not limited to, the following:
(1) Continuing medical, psychiatric, or psychological
treatment.
(2) Ongoing participation in a specified rehabilitation
program.
(3) Abstention from the use of alcohol or drugs.
(4) Compliance with all provisions of this chapter.
(b) (1) Notwithstanding any other provision of law, and for
purposes of this section, when deciding whether to grant a
probationary license, the director shall request that an
applicant with a dismissed conviction provide proof of that
dismissal and shall give special consideration to applicants
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whose convictions have been dismissed pursuant to Section 1203.4
or 1203.4a of the Penal Code.
(2) The director shall also take into account and consider
any other reasonable documents or individual character
references provided by the applicant that may serve as evidence
of rehabilitation as deemed appropriate by the director.
(c) The director may modify or terminate the terms and
conditions imposed on the probationary license upon receipt of a
petition from the applicant or licensee.
(d) For purposes of granting a probationary license to
qualified new applicants, the director shall develop standard
terms of probation that shall include, but not be limited to,
the following:
(1) A three-year limit on the individual probationary
license.
(2) A process to obtain a standard license for applicants who
were issued a probationary license.
(3) Supervision requirements.
(4) Compliance and quarterly reporting requirements.
REGISTERED SUPPORT / OPPOSITION :
Support
California Alarm Association (sponsor)
Los Angeles County District Attorney's Office
Opposition
None on file
Analysis Prepared by : Thomas Clark / JUD. / (916) 319-2334