BILL ANALYSIS Ó
SENATE COMMITTEE ON
BUSINESS, PROFESSIONS AND ECONOMIC DEVELOPMENT
Senator Jerry Hill, Chair
2015 - 2016 Regular
Bill No: SB 1253 Hearing Date: April 4,
2016
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|Author: |Moorlach |
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|Version: |February 18, 2016 |
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|Urgency: |No |Fiscal: |Yes |
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|Consultant|Mark Mendoza |
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Subject: Real estate brokers: limited liability companies
SUMMARY: Authorizes the issuance of a real estate broker license to a
limited liability company; mirrors the provisions regulating
real estate broker licenses issued to a corporation and applies
them to real estate broker licenses issued to limited liability
companies; makes other technical and conforming changes.
Existing law:
1)Provides for the licensure and regulation of real estate
brokers and real estate salespersons by the Bureau of Real
Estate (BRE) under the direction of the Real Estate
Commissioner (Commissioner). (Business and Professions Code
(BPC) §§ 10000-11288)
2)Lists corporation under the definition of "person". (BPC §
10006)
3)Prohibits any person from engaging in the business of, acting
in the capacity of, advertising as, or assuming to act as a
real estate broker or a real estate salesperson without first
obtaining a real estate license. (BPC § 10130)
4)Defines a real estate broker, in part, as one who sells, buys,
or who offers to sell or buy, solicits prospective sellers or
purchasers of, solicits or obtains listings of, or negotiates
the purchase, sale or exchange of real property or a business
SB 1253 (Moorlach) Page 2
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opportunity; or who leases or rents, or offers to lease or
rent, places for rent, or solicits listings of places for
rent, or solicits for prospective tenants, or negotiates the
sale, purchase or exchanges of leases on real property or on a
business opportunity, or collects rents from real property, or
improvements thereon, or from business opportunities. (BPC §
10131)
5)Provides that each officer of a corporation through whom is
licensed to act as a real estate broker may only act as such
for and on behalf of the corporation as an officer. (BPC §
10159)
6)Provides that the primary broker officer be responsible for
the supervision and control of the activities conducted on
behalf of the corporation by its officers and employees. (BPC
§ 10592.2)
7)Provides that no acts for which a real estate license is
required may be performed for, or in the name of, a
corporation when there is no officer of the corporation
licensed under BPC § 10158 and 10211. (Commissioner
Regulations (CR) § 2740)
8)Requires that an applicant for an original broker license for
a domestic corporation submit with the application, a
Certificate of Status (Domestic Corporation) executed by the
California Secretary of State not earlier than 30 days before
the date of mailing or delivering the application to the
headquarters office of the BRE.
(CR § 2742)
Existing law (Corporations Code):
1) 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. (Corporations Code (CORP) § 13401)
2) Establishes the California Revised Uniform Limited Liability
Company Act that allows for the formation of a limited
liability company (LLC). (CORP § 17701.01)
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3) Provides that a LLC may have any lawful purpose, regardless
of whether for profit, except the banking business, the
business of issuing policies of insurance and assuming
insurance risks, or the trust company business. (CORP §
17701.04(b))
4) Explicitly provides that a domestic or foreign LLC may 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 or foreign limited liability company to
hold that license, certificate, or registration. (CORP §
17701.04(b))
This bill:
1) Adds LLCs to the list of entities included in the definition
of "person".
2) Provides that specified violations of the Real Estate Law, by
an LLC, are a public offense punishable by $50,000.
3) Provides that, in the case of a disciplined licensee that is
a LLC, the order issued in resolution of a disciplinary
proceeding before the BRE may be made against the licensed
LLC.
4) Clarifies that the Commissioner may discipline a limited
liability broker licensee or its designated member, officer,
or manger, or both, for misconduct of a nonlicensed employee.
5) Provides that any person acting as a LLC without a license is
punishable by a fine not to exceed $60,000.
6) Provides that Commissioner may suspend or revoke the license
of a LLC who knowingly destroys, alters, conceals, mutilates,
or falsifies any of the books, papers, writings, documents,
or tangible objects that are required to be maintained.
7) Requires that if an LLC desires any of its members, managers,
or officers other than the primary broker officer to act
under its license as a real estate broker, the additional
member, manager, or officer must apply for licensure.
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8) Provides that each member, manager, or officer of a LLC
through whom it is licensed to act as a real estate broker
may only act as such for and on behalf of the LLC as a
member, manager, or officer.
9) Provides that the primary broker officer be responsible for
the supervision and control of the activities conducted on
behalf of the LLC by its members, managers, or officers.
10)Provides that LLCs that allow additional members, managers,
or officers to act under its license to have supervisory
responsibilities over its salespersons.
11)Requires that a certified copy of any resolution of the
members assigning supervisory responsibility over real estate
salespersons licensed to the LLC be filed with the
Commissioner within five days after the adoption or
modification thereof.
12)Requires LLCs to comply with existing continuing education
requirements for real estate brokers.
13)Provides that Commissioner may suspend or revoke the license
of a LLC who fails to exercise reasonable supervision and
control of the activities of the LLC for which a real estate
license is required.
14)Provides that the Commissioner may deny, suspend or revoke
the license the real estate license as to any member,
manager, officer, or agent acting under its license without
revoking the license of the LLC.
15)Requires LLCs to file a trust fund status report with the
Commissioner.
16)Requires that any monies in the Real Estate Fund that is
attributable to administrative fines, civil penalties, and
criminal penalties imposed by BRE against a LLC broker, or to
cost recovery by BRE from enforcement actions and case
settlements relating to a LLC broker, not be continuously
appropriated.
17)Makes other technical and conforming changes.
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FISCAL EFFECT: Unknown. This bill is keyed "fiscal" by
Legislative Counsel.
COMMENTS:
1. Purpose. The California Business Properties Association
(CBPA) is the sponsor of the bill. According to the Author,
"Under current California law, real estate brokers are not
permitted to be licensed as an LLC. This restriction is
antiquated as other professional groups have been able to
pass legislation allowing them tax liability protection of
being licensed as an LLC, including private investigators,
cemeteries, alarm company operators, and contractors. SB
1253 would allow an LLC to be licensed as a real estate
broker and avail themselves of the tax liability protections
of an LLC."
2. Limited Liability Company. An LLC is a hybrid business
entity that blends elements of partnership and corporate
structures. The LLC's main advantage over a partnership is
that, like the owners (shareholders) of a civil law
corporation, the liability of the owners (members) of an LLC
for debts and obligations of the LLC is limited to their
financial investment. In other words, all the owners
(members) are shielded from individual liability for debts
and obligations of the LLC. However, like a general
partnership, members of an LLC have the right to participate
in management of the LLC, and profit or losses flow through
to its members. An LLC may not be formed by certain types of
businesses that provide professional services requiring a
state professional license, such as legal or medical. For
California income tax purposes, an LLC will be classified as
a partnership if it has more than one owner and will be
treated as a disregarded entity if it has only one member.
California first recognized LLCs in 1994 with the enactment
of the Beverly-Killea Limited Liability Company Act
(Beverly-Killea), now the California Revised Uniform Limited
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Liability Company Act, which provided comprehensive
provisions for the organization, management, and dissolution
of LLCs ( SB 469 (Beverly, Ch. 1200, Stats. 1994)). That same
year, the National Conference of Commissioners on Uniform
State Laws (NCCUSL) approved the use of a Uniform Limited
Liability Company Act. In 2006, after reviewing the
development of LLC laws in the United States, NCCUSL adopted
the Revised Uniform Limited Liability Company Act (RULLCA),
which has been enacted in fourteen states (Alabama,
California, Florida, Idaho, Iowa, Minnesota, Nebraska, New
Jersey, North Dakota, South Dakota, Utah, Vermont,
Washington, Wyoming) and the District of Colombia.
3. Real Estate Corporation Licenses. In some cases, brokers
will elect to do business as a corporation. A corporation
may be licensed as a real estate broker, provided at least
one officer of the corporation is a duly qualified real
estate broker willing to act as the corporation's responsible
designated broker-officer. The designated corporate officer
is responsible for the supervision and control of the
activities requiring a license which are conducted, on behalf
of the corporation, by its officers and employees. The
designated broker officer may, by resolution of the board of
directors, assign supervisory responsibility over
salespersons licensed to the corporation to additional
licensed broker officers. The corporation must submit the
appropriate corporation license application and fee, and a
Certificate of Status issued by the Secretary of State within
30 days prior to the date the application is filed.
4. Broker-Officers. Each broker who is to act for and on behalf
of a corporation as a broker-officer must submit a completed
Corporation License Application and the appropriate license
fee. A license as an individual broker and a license as a
broker officer are separate entities and the status is not
transferable from one to the other. It is possible for an
individual broker to be issued a broker-officer license for
more than one corporation. Also, a corporation may be issued
any number of broker-officer licenses, in addition to the
designated or primary broker-officer for the corporation.
However, a Corporation License Application and license fee
must be submitted for each corporation broker-officer license
requested. The status as a broker-officer of one corporation
is not transferable to being a broker-officer of another
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corporation.
5. Previous Legislation. AB 2235 (Parra, 2006) would have
allowed real estate broker licensees to organize their
business as an LLC. This bill would also have required LLCs
to maintain at least $500,000 in liability insurance or an
amount equal to $100,000 multiplied by the number of
licensees in the firm, whichever is greater, up to a maximum
of $5 million. ( Status : This bill was not heard in the
Senate Committee on Judiciary).
AB 2261 (Parra, 2004) would have would have allowed real
estate broker licensees to organize their business as an LLC.
This bill would also have required LLCs to maintain at least
$500,000 in liability insurance or an amount equal to
$100,000 multiplied by the number of licensees in the firm,
whichever is greater, up to a maximum of $5 million. ( Status :
This bill was not heard in the Senate Committee on
Judiciary).
AB 469 (Cardoza, 1997) would have allowed real estate broker
licensees to organize their business as an LLC. This bill
also would have required LLCs to maintain an insurance policy
of at least $200,000 for the first $500,000 of annual gross
income and of another $200,000 for each additional $500,000
of annual gross income, with the maximum amount of insurance
not required to exceed $1,000,000 for claims per year.
( Status : This bill was later amended to allow architects to
form limited liability partnerships.)
AB 2401 (Miller, 1996) would have provided that an LLC may
not render professional services, unless the LLC is expressly
authorized under the applicable provisions of the Business
and Professions Code or the Chiropractic Act, or is a real
estate broker who is licensed under the real estate licensing
law. ( Status : This bill failed passage in this Committee.)
6. Arguments in Support. The CBPA underscores that "SB 1253
would add LLCs to the list of eligible real estate broker
licensees - in the same way that 'corporations' currently
hold such licenses - and would put real estate brokers on the
same footing as other professional licensed groups (such as
architects, engineers, attorneys) in California."
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The California Association of Realtors highlights that
"limited liability companies were created by California's
adoption of the Uniform Act, which allows corporate entities
to use the corporate structure, but gain the tax advantages
of a partnership. This relatively new corporate organization
is particularly helpful for small and growing companies like
real estate companies. Unfortunately, real estate licensees
were left out of the class of business that could use the new
format, and we support your correction of that error."
7. Policy Issues:
a) What costs will be imposed on BRE for this new license
category? Given the expected significant costs to create
and monitor a new licensure category, the Author may wish
to explain to the Committee how the creation of this new
license category outweighs the costs. The Author may also
wish to explain how this bill will fund ongoing staff
needed for administrative and enforcement efforts, both at
the BRE and the Secretary of State.
b) Should real estate brokers who form LLCs be exempt from
liability insurance? Historically, professions authorized
to form LLCs have been required to maintain a policy or
policies of insurance against liability claims for acts,
errors, or omissions arising out of the services it
provides. For example, contractors who hold LLC licenses
are required to have a $100,000 surety bond (in addition to
the $15,000 contractor bond) and maintain a $1 million
liability insurance policy. Similar requirements are in
place for private investigators, cemeteries, and alarm
company operators. The Author may wish to explain to the
Committee why real estate brokers who form LLCs are exempt
from liability insurance requirements and what other
mechanisms may be in place to protect the public from
illicit activity by licensees.
c) Prior unsuccessful bills. In both AB 2235 (Parra, 2006)
and AB 2261 (Parra, 2004), the Consumer Attorneys of
California highlighted pivotal concerns about adequate
liability protection. With the absence of any required
liability insurance policies in this bill, the Author may
wish to explain how this bill will alleviate the concerns
raised in 2006 and 2004.
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d) Transparency Issue. Over the past year, the U.S.
Treasury Department's Financial Crimes Enforcement Network
(FinCEN) has become concerned that all-cash purchases -
i.e., those without bank financing - may be conducted by
individuals attempting to hide their assets and identity by
purchasing residential properties through shell companies.
FinCEN defines shell companies as "limited liability
companies and other business entities with no significant
assets or ongoing business activities. Typically, these
companies have no physical presence other than a mailing
address, employ no one, and produce little to no
independent economic value." Combined with the existing
difficulty of identifying who owns an LLC, this business
model has unfortunately fallen prey to potential money
laundering situations. The Author may wish to address this
concern and discuss how the BRE will be able to identify
the true purchaser of a property behind an LLC involved in
certain high-end residential real estate transactions.
8. Proposed Amendments. The Author has promised to change the
obsolete references to the "Department" to the "Bureau" prior
to/in the Senate Judiciary Committee.
NOTE: Double-referral to the Senate Committee on Judiciary.
SUPPORT AND OPPOSITION:
Support:
California Business Properties Association (Sponsor)
California Association of Relators
Orange County Association of Realtors
Opposition:
None on file as of March 29, 2016.
-- END --
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