BILL ANALYSIS Ó SENATE COMMITTEE ON BUSINESS, PROFESSIONS AND ECONOMIC DEVELOPMENT Senator Jerry Hill, Chair 2015 - 2016 Regular Bill No: SB 284 Hearing Date: April 20, 2015 ----------------------------------------------------------------- |Author: |Cannella | |----------+------------------------------------------------------| |Version: |February 19, 2015 | ----------------------------------------------------------------- ---------------------------------------------------------------- |Urgency: |No |Fiscal: |Yes | ---------------------------------------------------------------- ----------------------------------------------------------------- |Consultant|Mark Mendoza | |: | | ----------------------------------------------------------------- Subject: Engineering and land surveying: limited liability partnerships. SUMMARY: Deletes the sunset date for engineers and land surveyors to form registered limited liability partnerships and foreign limited liability partnerships, thereby extending that authority indefinitely. Existing law, Business and Professions Code (BPC): 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. (BPC § 6700 et seq.) 2) Allows one or more civil engineer, electrical engineer, land surveyor, or mechanical engineer to practice or offer to practice within the scope of their license as a sole proprietorship, partnership, limited liability partnership (LLP), firm, or corporation if specified requirements are met. (BPC § 6738; 8729) 3) Sunsets as of January 1, 2016 statutes permitting licensed engineers and land surveyors to form a foreign LLP or registered LLP. (BPC § 6738) Existing law, the Corporations Code (CORP): 1) Authorizes attorneys, accountants, engineers, land surveyors, SB 284 (Cannella) Page 2 of ? and architects to form a LLP. (CORP § 16954 et seq.) 2) 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, the practice of engineering, the practice of land surveying, or the practice of law. (CORP § 16101(6)(A)) 3) 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, the practice of engineering, the practice of land surveying, or the practice of law. (CORP § 16101(8)(A)) 4) Defines "professional LLP services" as the practice of architecture, the practice of public accountancy, the practice of engineering, the practice of land surveying, or the practice of law. (CORP § 16101(14)) 5) Provides a January 1, 2019 sunset date for architects to form registered limited liability partnerships and foreign limited liability partnerships. (CORP § 16101(19)) 6) Provides that only registered LLPs and foreign LLPs, through a licensed person, are recognized in this state and may render professional services. (CORP § 16951) 7) Requires a registered LLP or foreign LLP offering accountancy, legal, engineering, land surveying, architectural services to provide security as specified against claims based upon acts, errors, or omissions arising out of the practice of these professions. (CORP § 16956) 8) Provides as an option for providing security for claims that the engineers and land surveyors 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 SB 284 (Cannella) Page 3 of ? or fewer licensees of not less than $2,000,000, 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 engineers or land surveyors. (CORP § 16956(a)(4)(A)) This bill: 1) Deletes the sunset date for engineers and land surveyors to form registered limited liability partnerships and foreign limited liability partnerships, thereby extending that authority indefinitely. 2) Restates the January 1, 2019 sunset date for architects to form registered limited liability partnerships and foreign limited liability partnerships. 3) Makes other technical and conforming changes. FISCAL EFFECT: Unknown. This bill has been keyed "fiscal" by Legislative Counsel. COMMENTS: 1. Purpose. This bill is sponsored by the American Council of Engineering Companies (ACEC) to indefinitely extend the authority to arrange as a limited liability partnership to engineering and land surveying firms. According to the Author, "Engineers and land surveyors are a foundation for businesses growth in California and continuing to extend the same flexibility to form limited liability partnerships as architects allows them to contribute to business and job growth throughout the state." 2. 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 SB 284 (Cannella) Page 4 of ? 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. 3. Limited Liability Companies, Limited Liability Partnerships and Professional Services. Formation and operation of limited liability companies (LLC) in California was authorized in 1994 through the Beverly-Killea Limited Liability Company Act (SB 469, Chapter 1200, Statutes of 1994). An uncodified provision in the Act specified that nothing in the Act shall be construed to permit a domestic or foreign limited liability company to render professional services, as defined in the Corporations Code, unless expressly authorized under applicable provisions of the Business and Professions Code or the Chiropractic Act. 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 requiring that an LLP be expressly authorized was apparently to ensure that service providers who harm others by their misconduct, incompetence, or negligence should not be able to limit their liability by operating as an LLP and thus become potentially judgment-proof. 4. Prior Related Legislation. SB 1008 (Padilla, Chapter 634, Statutes of 2010) authorized limited liability partnerships and foreign limited liability partnerships to be formed by person licensed to engage in the practice of engineering or land surveyors. A sunset date of January 1, 2016 was included. SB 392 (Florez, Chapter 698, Statutes of 2010) authorized the SB 284 (Cannella) Page 5 of ? Contractors State License Board to issue a contractor license to an LLC, and incorporated the LLC business structure into the contractor license provisions. AB 2914 (Leno, Chaper 426, Statutes of 2006) further extended the sunset date for architects to organize as LLPs to January 1, 2012. AB 1265 (Benoit, 2003) would have permitted professional engineers and land surveyors to organize as an LLP and would have required the same insurance liability coverage as that of architects. ( Status : This bill failed passage in Senate Judiciary Committee.) AB 1596 (Shelley, Chapter 595, Statutes of 2001) extended the sunset date of statutes permitting architects to organize as LLPs to January 1, 2007. AB 469 (Cardoza, Chapter 504, Statutes of 1998) permitted architects to form an LLP provided the partnership had between $500,000 and $5 million in insurance depending on the number of partners in the LLP; also provided that the provisions of AB 469 would sunset on January 1, 2002. SB 513 (Calderon, Chapter 679, Statutes of 1995) permitted accountants and attorneys to form an LLP. Accountants forming an LLP were required to have between $500,000 and $5 million in insurance, and attorneys were required to have between $500,000 and $7.5 million in insurance, depending upon the number of partners in the LLP. 5. Arguments in Support. The American Council of Engineering Companies (Sponsor) argues that "SB 284 will offer unique project delivery opportunities and allow for the creation of specialty partnerships to deliver California's infrastructure. SB 284 will encourage the expansion of business practices while bringing California into parity with the vast majority of other states, all of which allow professional services to be engaged in these business structures." 6. Policy Issue : Should there be a five-year sunset date placed on the provisions which allow for engineers and land surveyors to form LLPs similar to that placed on architects? SB 284 (Cannella) Page 6 of ? Over the course of the past two decades, the Legislature has continuously extended the sunset dates allowing architects to form LLPs. In particular, AB 1596 (Shelly, 2001) originally attempted to eliminate the sunset date entirely for architects. However, when the bill was heard in Senate Judiciary Committee, there was concern about the claims data presented and whether it accurately reflected what might be current and future claims regarding judgments assessed against architects for professional negligence. No claims data was provided to this Committee regarding civil engineers or land surveyors. Due to the history of the sunset provisions as required by other professions (i.e. architects) and incomplete data provided, the Committee may wish to reinstate a five year sunset provision into the bill and reevaluate claims data in five years. 7. Suggested Author's Amendment . Given the short window engineer and land surveyors have been authorized to form as LLPs (only 5 years), the Author should provide for a five year sunset date rather than eliminating the sunset date entirely. However, once this five year extension has expired in 2021, consideration should be given to eliminating the sunset date entirely, rather than extending it to 2026. NOTE : Double-referral to Senate Committee on Judiciary (Second). Any amendments to this bill should be made in the Senate Committee on Judiciary. SUPPORT AND OPPOSITION: Support: American Council of Engineering Companies (Sponsor) American Institute of Architects, California Council California Land Surveyors Association Structural Engineers Association of California Opposition: None on file as of April 14, 2015. -- END -- SB 284 (Cannella) Page 7 of ?