BILL ANALYSIS
-----------------------------------------------------------------
|Hearing Date:April 13, 2009 |Bill No:SB |
| |392 |
-----------------------------------------------------------------
SENATE COMMITTEE ON BUSINESS, PROFESSIONS AND ECONOMIC
DEVELOPMENT
Senator Gloria Negrete McLeod, Chair
Bill No: SB 392Author:Florez
As Introduced: February 26, 2009 Fiscal:Yes
SUBJECT: Contractors: limited liability companies.
SUMMARY: Authorizes the issuance of a contractor's license
to a limited liability company (LLC); mirrors the
provisions regulating contractor's licenses issued to a
corporation and applies them to contractor's licenses
issued to LLCs; requires an LLC to carry $1,000,000 in
liability insurance or $500,000 in a trust or escrow
account; makes technical and conforming changes.
Existing law:
1)Provides for the licensure and regulation of more than 250,000
contractors under the Contractors State License Law
(Contractors Law) by the Contractors State License Board
(CSLB) within the Department of Consumer Affairs (DCA).
2)Defines "person" for the purpose of the Contractors Law
to include an individual, firm, partnership, corporation,
association, or other organization, and prohibits any
person from engaging in the business or acting in the
capacity of a contractor without a license.
3)Authorizes the issuance of contractor licenses to individual
owners, co-partnerships, corporations and joint ventures, and
requires applicants for licensure to show a specified degree
of knowledge and experience, and prescribes qualifications for
the license. The applicant shall meet the experience and
knowledge qualifications, in one of the following ways:
a) If an individual, that individual or a responsible
SB 392
Page 2
managing employee shall meet the qualifications for the
license classification.
b) If a partnership, a general partner or responsible
managing employee shall meet the qualifications for the
license classification.
c) If a corporation, or any other combination or
organization, a responsible managing officer or responsible
managing employee shall meet the qualifications for the
license classification.
4)Further, requires the individual who meets the qualification
for licensure to be held responsible for exercising direct
supervision and control over the operation of the contractor
business in order to ensure full compliance with the
Contractors Law.
5)Permits a contractor's license number to be reissued or
reassigned to an immediate family member of a licensed
individual who is deceased or absent if the license is
required to continue an existing family contracting
business, or to a corporation created by immediate family
members of a licensed individual to continue an existing
deceased or absent individual licensee's contracting
business. An "immediate family member" for these
purposes is a spouse, brother, sister, son, daughter,
stepson, stepdaughter, grandson, granddaughter,
son-in-law or daughter-in-law.
6)Requires, under certain circumstances, a contractor to
use a home improvement contract or a service and repair
contract, and requires the contracts to contain specified
elements and make specific disclosures and notices,
including a notice concerning general liability
insurance.
Existing law (Corporations Code):
1)Establishes the Beverly-Killea Limited Liability Company Act
(LLC Act), to provide for "limited liability companies" (LLCs)
to organize and do business in California, and allows foreign
LLCs (any LLC organized outside of California) to register to
do business in this state.
2)Provides that an LLC may engage in any lawful activity except
SB 392
Page 3
banking, insurance or trust company operations or the offering
of professional services for which a license, certification or
registration is required, unless expressly authorized under
provisions of the Business and Professions Code or the
Chiropractic Act.
This bill:
1)Includes limited liability company within the definition
of "person" for purposes of the Contractors Law.
2)Defines "qualifying person," "qualifying individual," or
"qualifier" as a person who meets the qualifications for
the license classification on behalf of the license
applicant.
3)Authorizes the issuance of a contractor's license to a
limited liability company (LLC), and mirrors the
provisions regulating contractor's licenses issued to a
corporation and applies them to contractor's licenses
issued to LLCs.
4)Provides that if an LLC applies for a contractor's
license, a responsible managing officer, responsible
managing manager, or responsible managing employee shall
meet the qualifications for the license classification.
5)Requires as a condition of licensure, in addition to any
required bond, that an LLC shall file with the Registrar
of Contractors evidence of security for claims based upon
acts, errors or omissions by the LLC's contracting
services. The security shall be any of the following:
a) Liability insurance of not less than $1,000,000.
b) Maintain in trust or bank escrow, cash, bank
certificates of deposit, U. S. Treasury obligations,
bank letters of credit, or bonds of insurance or
surety companies for payment of liabilities of not
less than $500,000.
c) A combination of both a) and b).
6)Specifies that an immediate family member for purposes of
reassignment of a deceased or absent individual's license
also includes a father, mother, grandfather, and
SB 392
Page 4
grandmother.
7)Revises the notice concerning general liability insurance
in the home improvement contract and the service and
repair contract to require an LLC to provide a notice
regarding the liability insurance or trust or bank escrow
deposits under item # 5), above.
8)Makes related, conforming provisions to incorporate LLCs
within the licensing scheme for contractors and makes
technical, correcting, and clarifying changes.
9)Authorizes, under the LLC Act, a limited liability
company to render services that may be lawfully rendered
only under a license, certificate, or registration
authorized by the Business and Professions Code, if the
Code authorizes a limited liability company to hold that
license, certificate, or registration.
FISCAL EFFECT: Unknown. This bill has been keyed "fiscal"
by Legislative Counsel.
COMMENTS:
1.NOTE : Last Year's SB 1337 (Correa). This bill is a
reintroduction of last year's SB 1337 (Correa) which
failed passage in Senate Judiciary Committee. That bill
passed this Committee on a 6-0 vote.
The primary differences between this bill and SB 1337 is
the requirement in this bill for a LLC to carry
$1,000,000 in liability insurance or $500,000 in liquid
assets (see "This Bill" item # 5, above). Last year's
bill did not contain any requirement for an LLC to have
liability coverage, but only required the LLC to adhere
to the same licensing bond provisions as a corporation
holding a contractor's license ($12,500 licensing bond).
Concern was raised in the Senate Judiciary Committee
whether liability insurance should be required for an LLC
that is at least equal to that required for an architect,
accountant, or attorney LLP. In response to that issue,
this measure has been introduced with the liability
provisions described above.
It appears that a consequence of the bill's requirement for
SB 392
Page 5
an LLC contractor to carry $1,000,000 in liability
insurance or $500,000 in liquid assets may be to preclude
smaller contractor businesses from organizing as an LLC
due to the costs of the required liability coverage.
Last year, one of the arguments made by the proponents
was that the bill would have advantages for both large
and small contractors' businesses; that the LLC structure
provided flexibility which is often needed for small
businesses, and more easily allows a family business to
be passed down to other family members. It does not
appear that the same arguments are being made for this
year's bill. Discussions with the proponents have
indicated that it is more likely that larger business
will organize as LLCs under the bill.
2.Purpose. This bill is sponsored by the Associated
General Contractors of California and Associated General
Contractors of San Diego (Sponsors) to authorize issuance
of a contractor's license to limited liability companies.
The Sponsors state that the existing Contractors Law is
archaic since most states allow an LLC to hold a
contractor's license, and the current law is an
impediment to established nationwide business doing
business in California. The Sponsors believe that the
LLC form of business has needed flexibility for
distribution of profits and losses separate from control
and ownership which benefits commerce with no foreseeable
detriment.
The Sponsors argue that the exclusion of LLCs from the
Contractors Law was not a calculated decision since the
Contractors Law was adopted in 1929 and the existing LLC
Act was adopted in 1994. Now, according to the Sponsors,
14 years after the passage of the LLC Act, LLCs comprise
an indelible part of the business landscape in California
and throughout the United States. This bill is necessary
so that LLCs may be utilized in the construction industry
just as they are in other industries in California. Of
the 29 states that license or regulate contractors, only
California imposes a complete ban on operating as an LLC,
according to the Sponsors.
3.Background. Limited liability companies are a relatively
new form of business entity for the state. Formation and
operation of such entities in California was authorized
SB 392
Page 6
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
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 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 an 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 an LLC.
4.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 Business and Professions
Code may conduct its activities as a limited liability
company if the services rendered require only a
nonprofessional, occupational license.
In discussing the distinctions between professional
services and nonprofessional occupational services, the
AG Opinion further discusses Mann v. Department of Motor
Vehicles (1999) 76 Cal.App.4th 312, (Mann), in which the
court concluded that the services performed pursuant to a
vehicle salesperson license issued under the Vehicle Code
were not "professional services," but rather were
SB 392
Page 7
"nonprofessional, occupational" services.
The AG Opinion further states that:
Following the reasoning of Mann, we find that some
services that require a license, certification, or
registration pursuant to the Business and Professions
Code are "professional services" and others are
"nonprofessional services." To determine whether a
particular service is one or the other requires an
examination of the educational, training, and testing
prerequisites.
5.DCA Legal Affairs Letter Regarding LLCs under the
Department. In a May 23, 2006 letter from the DCA Legal
Affairs Office regarding the issuance of contractor
licenses by the CSLB to an LLC, the Department's legal
counsel stated that "with respect to the CSLB, we do not
believe that it has the legal authority to issue a
contractor's license to an LLC." In discussing reasons
for its conclusion, the letter discussed the AG Opinion
(No. 04-103) and its reliance upon the Mann decision's
distinction between professional services and
nonprofessional services by looking at the requirements
to obtain the license in question. DCA counsel stated:
The requirements to obtain a contractor's license
include an experience requirement, character, fiscal
responsibility, and a written examination. While it
could be argued that the requirements are not similar
to the "learned" professions, such as architecture or
engineering, they nonetheless include requirements for
four years of experience and state testing. When
applied to the requirement to obtain a contractor's
license, the Mann test does not provide a definitive
answer as to whether a contractor's services should be
characterized as professional or nonprofessional.
DCA counsel concluded that it is debatable whether a
contractor's license should be characterized as
professional or nonprofessional for the purposes of
determining whether an LLC should be permitted to obtain
a contractor's license.
6.Related legislation. SB 1225 (Harman, Chapter 114,
Statutes of 2008) allows a LLC to operate as a cemetery
SB 392
Page 8
authority (cemetery owner) 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 or assets.
Prohibits a person licensed to provide any cemetery or
funeral-related service from having any ownership
interest as a member of a cemetery LLC.
AB 2235 (Parra, 2006) would have expanded the definition of
"person" under the Real Estate Law to include an LLC.
That bill died in the 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 B&P
Professions Code or the Chiropractic Act. That bill died
in the Senate Judiciary Committee without being heard.
AB 2724 (Runner, 2002) would authorize contractor's
licenses to be issued to limited liability companies that
meet certain requirements. That bill died in the
Assembly Business and Professions Committee without being
heard.
AB 2401 (Miller, 1996) would have provided that an LLC may
not render professional services, unless the LLC is
expressly authorized under the B&P Code 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. That bill failed passage in Senate
Business and Professions 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 (Killlea, Chapter 1200, Statutes of 1994)
established the initial LLC Act, to provide for LLCs to
SB 392
Page 9
organize and do business in California, and allow LLCs
organized outside of California to register to do
business in California. The bill provided that an 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 an 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.
SB 141 (Beverly, Chapter 57, Statutes of 1996) corrected
various technical inconsistencies in the LLC Act, and
made other revisions.
7.Arguments in Support. The California Landscape
Contractors Association (CLCA) supports the bill, and
states that LLCs are a common way for contractors to
organize their businesses in most other states. CLCA
states that concerns about consumer harm from an
inadequately capitalized or undersized or underinsured
LLC who is found liable for a construction defect or some
other business related tort claim is addressed by
requiring the LLC to maintain at least $1 million of
liability insurance or hold at least $500,000 in liquid
capital assets or an equivalent surety bond. CLCA
recognizes that the provisions of the bill may preclude
smaller contractors from organizing as LLCs, but still
believes that the bill is a step in the right direction.
The Engineering Contractors Association , the Marin Builders
Association , the California Fence Contractors
Association , the Flasher/Barricade Association , the
Engineering and Utility Contractors Association , and the
Golden State Builders Exchanges argue in support that
California is the only state that licenses contractors
that does not allow a license to be issued to an LLC; and
strongly supports the bill arguing that LLCs provide
businesses flexibility to distribute profits and losses
to owners without double taxation and does not
disadvantage consumers because they provide no greater
liability protection for the personal assets of owners
than current "C" or "S" corporations.
8.Authors Amendments.
SB 392
Page 10
A. Discussions between the Sponsors and the
Contractors State License Board have suggested that
the implementation of the bill should be delayed until
January 1, 2011, so that the CSLB would have time to
make the revisions to its applications and processes
to incorporate the necessary changes required to
license LLCs as contractors.
The Author is proposing amendments in Committee to delay
the implementation of the bill until January 1, 2011.
B. A number of technical, clean-up amendments have
been noted which need to be made in the bill,
including the following:
On page 3, line 6, strike out "of any"
On page 7, line 12, strike out "in" and insert: on
On page 28, line 16, after "manager" insert a comma.
On page 37, line 4, strike out "about" and insert:
About
On page 48, line 16, strike out "a size equal" and
"to"
The Author is proposing technical amendments to make
the necessary corrections in the bill.
Note : Double referral to Judiciary Committee (second).
This bill has been double referred to both the Business and
Professions Committee and the Senate Judiciary Committee.
The Judiciary Committee heard the original legislation
creating the LLC law in 1994, which was designed to give
businesses an additional method to operate and reduce the
personal liability exposure of individuals while providing
businesses with a more favorable tax treatment. If this
bill is passed by the BP&ED Committee, it will be referred
to the Judiciary Committee.
SUPPORT AND OPPOSITION:
Support:
Associated General Contractors of California (Sponsor)
SB 392
Page 11
Associated General Contractors of San Diego (Sponsor)
California Fence Contractors Association
California Landscape Contractors Association
Engineering and Utility Contractors Association
Engineering Contractors Association
Flasher/Barricade Association
Golden State Builders Exchanges
Marin Builders Association
Opposition:
None received as of April 7, 2009
Consultant:G. V. Ayers