BILL ANALYSIS Ó
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|Hearing Date:June 16, 2014 |Bill No:AB |
| |1608 |
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SENATE COMMITTEE ON BUSINESS, PROFESSIONS
AND ECONOMIC DEVELOPMENT
Senator Ted W. Lieu, Chair
Bill No: AB 1608Author:Olsen
As Amended: March 18, 2014Fiscal: Yes
SUBJECT: Private investigators: limited liability companies.
SUMMARY: Authorizes a licensed private investigator to organize as a
limited liability company (LLC) until January 1, 2020; requires a
private investigator that is a LLC to maintain liability insurance, as
specified; makes technical, updating and conforming changes.
Existing law:
1)Licenses and regulates private investigators by the Bureau of
Security and Investigative Services (BSIS) within the Department of
Consumer Affairs (DCA) under the Private Investigator Act (Act) and
makes a violation of the Act a crime. (Business and Professions
Code (BPC) § 7512 et seq.)
2)Authorizes the BSIS to license and regulate security guards,
proprietary private security employers, proprietary private security
officers, alarm companies, locksmiths, private patrol operators, and
repossession companies and their employees. (BPC §§ 6980; 7500;
7574; 7580; 7590)
3)Defines "licensee" as a person licensed under the Act, and defines
"person" as any individual, firm, company, association,
organization, partnership, and corporation. (BPC §§ 7512.3; 7512.6)
4)Authorizes a private investigator to provide services to protect a
person, but not property, incidental to an investigation which the
investigator has previously been hired to perform, and requires, if
the investigator provides those services, that he or she comply with
specified requirements, including maintaining an insurance policy of
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at least $500,000 for any one loss due to bodily injury or death,
and any one loss due to injury or destruction of property.
(BPC §§ 7521.5; 7583.39; 7583.40; 7583.41)
5)Establishes specific requirements for an application for a private
investigator license, including:
a) The application must be verified and include, among other
things, the full name and business address of the applicant, the
name under which the applicant intends to do business, a
statement as to the general nature of the business in which the
applicant
intends to engage, and a verified statement of his or her
experience qualifications.
(BPC § 7525.1)
b) Requires an individual, qualified manager, partner or
corporate officer to submit fingerprint images with the
application for the purpose of conducting criminal background
checks. (BPC § 7525.1 (e))
c) Requires, if the applicant is a corporation, the application
to state the true names, and complete residence addresses of the
chief executive officer, secretary, chief financial officer, and
any other corporate officer who will be active in the business,
and the designated person to be actively in charge of the
business, and requires the application to be signed under penalty
of perjury. (BPC § 7525.1(h))
1)Under the Collateral Recovery Act, authorizes BSIS to issue a
repossessor license to an individual, partnership, limited liability
company or corporation. (BCP § 7503.4)
2)The Alarm Company Act authorizes, until January 1, 2016, BSIS to
issue an alarm company license to an individual, partnership,
limited liability company or corporation. (BPC § 7593)
3)Establishes the California Revised Uniform Limited Liability Company
Act (LLC Act) to govern the formation and operation of limited
liability companies. (Corporations Code Section (CC) § 17701.01 et
seq.)
4)Provides that a LLC may engage in any lawful activity except banking,
insurance, or trust company operations or the offering of
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professional services, and authorizes an LLC to render services that
may be lawfully rendered only pursuant to a license, certificate, or
registration authorized by the BPC if the applicable provisions of
the BPC authorize a limited liability company to hold that license,
certificate, or registration. (CC § 17701.04 (b))
5)Provides that nothing under the LLC Act shall be construed to permit
a domestic or foreign LLC to render professional services, as
specified. (CC § 17701.04 (e))
11)Defines professional services as "any type of professional services
that may be lawfully
rendered only pursuant to a license, certification, or registration
authorized by the Business and Professions Code, the Chiropractic
Act, or the Osteopathic Act." (CC § 13401)
This bill:
1)Authorizes, until January 1, 2020, a private investigator to be
licensed as a LLC.
2)Requires, as a condition of the issuance, reinstatement,
reactivation, or continued valid use of a private investigator
license, a LLC to maintain a liability insurance for damages due to
acts, errors, or omissions arising out of the private investigator
services it provides in the following amounts:
a) Requires $1 million in liability insurance for a licensee that
has up to five managing members.
b) Requires an additional $100,000 in coverage for each
additional managing member up to five million dollars
($5,000,000) in total insurance.
3)Requires a LLC applicant to submit information and documentation to
the BSIS which demonstrates compliance with financial security
requirements, and to submit a Certificate of Liability Insurance to
BSIS, as specified.
4)Requires a LLC applicant to state the true name and complete
residence address of each managing member and any other officer or
member who will be active in the business, and the designated person
actively in charge of the business.
5)Requires a copy of the most recent articles of organization, filed
with the Secretary of State, to be supplied to BSIS upon request.
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6)Requires the LLC application to be signed under penalty of perjury.
7)Makes technical, updating and conforming changes.
FISCAL EFFECT: This measure has been keyed as "fiscal" by Legislative
Counsel. The May 7, 2014 Assembly Appropriations Committee analysis
states that costs associated with this legislation would be minor and
absorbable within existing resources.
COMMENTS:
1.Purpose. This bill is sponsored by the California Association of
Licensed Investigators (CALI) in order to allow licensed private
investigators to enjoy the benefits of operating as a LLC, which may
include tax benefits and protection from individual civil liability.
2.Background.
a) Private Investigators in California. There are approximately
9,000 private investigators licensed by the BSIS. License
requirements include 6,000 hours of compensated experience in
investigative work over 3 years, a law degree or completion of a
4-year course in police science plus 2 years (i.e. 4,000 hours)
of experience or an associate degree in police science, criminal
law, or justice and 2 1/2 years (i.e. 5,000 hours) of experience.
Licensing requirements also include passing a criminal offender
background check by the California Department of Justice (DOJ)
and the Federal Bureau of Investigation (FBI) and payment of the
$125 licensing fee.
There are many types of investigations carried out by private
investigators such as identifying witnesses, locating missing
children and adults, confirming the occurrence of workers'
compensation fraud, and performing background checks regarding
job applicants. While the majority of licensed private
investigator businesses are organized as sole proprietorships,
others are organized as corporations or partnerships.
b) LLC: A New Business Organization - A LLC is a relatively new
form of business organization in this state. A LLC is a hybrid
entity formed under the Corporations Code and consists of at
least two members who own membership interests. The company has
a legal existence distinct from its members and provides members
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with limited legal liability to the same extent enjoyed by
shareholders of a traditional corporation, but allows the members
to actively participate in the management and control of the
company. Some benefits of organizing as a LLC include
pass-through taxation (which means that money the companies
earned is taxed only once at the individual member's personal
income tax rate), and protection from individual liability for
liability incurred by or judgments against the LLC.
c) Beverly-Killea Limited Liability Company Act - The formation
and operation of LLCs in California was authorized in 1994
through the Beverly-Killea Limited Liability Company Act (SB 469,
Chapter 1200, Statutes of 1994). As originally enacted, an
uncodified provision specified that nothing in the Act shall be
construed to permit a limited liability company to render
professional services, unless expressly authorized under the
Business and Professions Code. This provision was codified in
1999 ( SB 284 , Kelley, Chapter 1000, Statutes of 1999).
Under the Moscone-Knox Professional Corporation Act (Corporations
Code § 13400 ff.), "professional services" is defined as any type
of professional services that may be lawfully rendered only
pursuant to a license, certification, or registration authorized
by the Business and Professions Code, the Chiropractic Act, or
the Osteopathic Act.
The rationale for the exclusion was apparently that service
providers who harm others by their misconduct, incompetence, or
negligence should not be able to limit their liability by
operating as a LLC and thus become potentially judgment-proof.
Based upon these provisions of law, it has been commonly understood
that the boards and bureaus under the Department of Consumer
Affairs are prohibited from issuing a license, certification or
registration to an entity organized as a LLC
d) Attorney General Opinion - In 2004, Attorney General Opinion
No. 04-103 concluded that a business that provides services
requiring a license, certification, or registration pursuant to
the BPC may conduct its activities as a LLC if the services
rendered require only a non-professional, occupational license.
The opinion noted that courts have drawn a distinction between
professional licenses and non-professional occupational licenses,
and that an examination of the level of education, training, and
testing required to provide a service may determine whether a
particular service is professional or non-professional. The
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opinion found that the prohibition against rendering professional
services did not prevent a LLC from offering "non-professional"
services that require a license, certification, or registration
pursuant to the BPC, and thus allowed a LLC to provide
"non-professional" services.
e) Authorization for an LLC to Render Professional Services - In
2010, SB 392 (Florez, Chapter 698, Statutes of 2010) amended the
Corporations Code to specifically provide that a LLC "may render
services that may be lawfully rendered only pursuant to a
license, certificate, or registration authorized by the Business
and Professions Code if the applicable provisions of the Business
and Professions Code authorize a limited liability company to
hold that license, certificate, or registration."
Thus, if a licensing law under the BPC specifically authorizes a
LLC to hold a license, then a LLC may obtain a professional
license under that provision.
Since the Opinion and the enactment of SB 392, the Legislature has
subsequently provided express authorization to alarm companies
( SB 1077 , Chapter 291, Statutes of 2012); contractors ( SB 392 ,
Chapter 698, Statutes of 2010); private cemeteries ( SB 1225 ,
Chapter 114, Statutes of 2008); and repossession agencies ( AB
1541 , Chapter 505, Statutes of 1995). This bill seeks to make
that same authorization for private investigators.
f) Limited Liability Partnerships (LLP). In addition to allowing
the businesses above to organize as LLCs, the Legislature has
also created an alternative to the LLC by allowing certain
professional service providers, namely attorneys, accountants,
engineers, land 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 a
LLC and limits a partner's 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 reversed by either providing
express LLC authorization to a handful of professional services
in the BPC, or by permitting other professional service providers
to obtain similar protections by forming a LLP. This bill
follows this trend by providing express authorization for private
investigators to form LLCs.
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g) LLCs Under the BSIS. As previously indicated, the BSIS
regulates a wide range of licensees including private
investigators, security guards, proprietary private security
employers, proprietary private security officers, alarm
companies, locksmiths, private patrol operators, repossession
companies and their employees. There has been a growing trend
toward authorizing licensees under each of these disciplines to
organize as LLCs.
In 1995, AB 1541 (Lee, Chapter 505, Statutes of 1995) authorized
repossessors to become LLCs, and in 2012 SB 1077 (Price, Chapter
291, Statutes of 2012) authorized alarm companies to be organized
as LLCs. There has additionally been discussion of authorizing
locksmiths to become LLCs. This bill is the latest effort in the
trend for BSIS licenses to become LLCs.
h) Limited Liability, Insurance Requirements, and Sunset
Provision. Given that the primary reasons for forming a LLC is
to reap the benefits of limited liability and to reap tax
benefits, 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, this bill
imposes a liability insurance requirement comparable to levels
required of professionals who organize as a LLP or LLC. The
liability insurance requirement will be more closely reviewed by
the Senate Judiciary Committee, where this bill will be next
referred.
In addition, as with other legislation which permitted specific
professional service businesses to form LLCs, this bill also
includes a sunset date of January 1, 2020. 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.
1. Related Legislation. SB 1077 (Price, Chapter 291, Statutes of
2012) authorized an alarm company to be organized as a LLC,
required an alarm company LLC to maintain an insurance liability
policy of at least one million dollars ($1,000,000), required BSIS
approval to assign a license between business entities, and
authorized BSIS to cite and fine alarm companies operating without
a license.
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SB 392 (Florez, Chapter, 698, Statutes of 2010) authorized the
Contractors State License Board to issue a contractor license to a
LLC, and incorporated the LLC business structure into the
contractor license provisions. The bill additionally amended the
Corporations Code to authorize a LLC to render services pursuant to
a license, certificate, or registration under the BPC if the
applicable provisions of the BPC authorize a LLC to hold that
license, certificate, or registration.
SB 1225 (Harman, Chapter 114, Statutes of 2008) authorized a LLC to
operate as a cemetery authority (licensed cemetery) and provide
various cemetery and funeral-related services, by employing persons
licensed for these services, if the LLC maintains a specified
minimum amount of insurance and/or assets.
SB 1337 (Correa, 2008) would have allowed a limited liability company
to render contractor services that are "professional services"
prohibited by the LLC Act, by authorizing the issuance of a
contractor's license to a LLC under the BPC. ( Status : SB 1337
died in Senate Judiciary Committee.)
AB 2235 (Parra, 2006) would have expanded the definition of "person"
under the Real Estate Law to include a LLC. ( Status : AB 2235 died
in Senate Judiciary Committee without being heard.)
SB 1022 (Campbell, 2005) sought to authorize professional limited
liability companies to provide specified professional services.
That bill would have defined "professional services" to mean any
type of professional services that may only be lawfully rendered
pursuant to a license, certification, or registration under the BPC
or the Chiropractic Act. ( Status : SB 1022 died in Senate
Judiciary Committee without being heard.)
AB 2724 (Runner, 2002) would have authorized contractor's licenses to
be issued to limited liability companies that meet certain
requirements. ( Status : AB 2724 died in Assembly Business and
Professions Committee without being heard.)
AB 2401 (Miller, 1996) would have provided that a LLC may not render
professional services, unless the LLC is expressly authorized under
the BPC or the Chiropractic Act, or is a real estate broker
licensed under the real estate law. The bill sought to amend the
contractor, architectural, engineering, and land surveying
provisions of the B&P Code to authorize the licensure of LLCs.
( Status : AB 2401 failed passage in Senate Business and Professions
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Committee.)
AB 1541 (Lee, Chapter 505, Statutes of 1995) included LLCs in the
statutory definition of the types of business entities (e.g.,
corporations) that can be licensed as repossession agencies, and
specified the contents of an application for license by a limited
liability company.
SB 469 (Killea, Chapter 1200, Statutes of 1994) established the
initial LLC Act, to provide for LLCs to organize and do business in
California, and allow LLCs organized outside of California to
register to do business in California. The bill provided that a
LLC may engage in any lawful activity except banking, insurance or
trust company operations, and in an uncodified provision, stated
that nothing in the Act shall be construed to permit a LLC to
render professional services, as defined, for which a license,
certification or registration is required, unless expressly
authorized under provisions of the B&P Code or the Chiropractic
Act.
2.Arguments in Support. In sponsoring the bill, the California
Association of Licensed Investigators (CALI) states that the bill
would amend the Private Investigator Act in the Business and
Professions Code to authorize limited liability companies to be
licensed as private investigators by the BSIS, with a sunset on
January 1, 2020. The bill would require the submission of pertinent
information to the BSIS within DCA and would require liability
insurance. The legislation is modeled after recently-enacted
measures that authorize LLCs for cemeteries, contractors and alarm
companies, according to CALI.
NOTE: Double-referral to Judiciary Committee second.
SUPPORT AND OPPOSITION:
Support:
California Association of Licensed Investigators (Sponsor)
Opposition:
None received as of June 11, 2014.
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Consultant:G. V. Ayers