BILL ANALYSIS
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|SENATE RULES COMMITTEE | SB 392|
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THIRD READING
Bill No: SB 392
Author: Florez (D)
Amended: 4/21/09
Vote: 21
SENATE BUSINESS, PROF. & ECON. DEV. COMMITTEE : 8-0,
4/13/09
AYES: Negrete McLeod, Wyland, Aanestad, Florez, Oropeza,
Romero, Walters, Yee
NO VOTE RECORDED: Corbett, Correa
SENATE JUDICIARY COMMITTEE : 5-0, 4/28/09
AYES: Corbett, Harman, Florez, Leno, Walters
SENATE APPROPRIATIONS COMMITTEE : 13-0, 5/11/09
AYES: Kehoe, Cox, Corbett, Denham, DeSaulnier, Hancock,
Leno, Oropeza, Runner, Walters, Wolk, Wyland, Yee
SUBJECT : Limited liability companies: licensed
contractors
SOURCE : Associated General Contractors of California
Associated General Contractors - San Diego
DIGEST : This bill allows a limited liability company
(LLC) to render contractors services that are "professional
services" otherwise prohibited by the Beverly-Killea
Limited Liability Company, by authorizing the issuance of a
contractor's license to the company under the Business and
Professions Code. This bill provides that a contractor-LLC
CONTINUED
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obtain and maintain a
$1 million insurance policy or place on deposit or escrow
$1 million plus an additional $100,000 per licensee in
excess of five employed by the LLC, up to $5 million in
total insurance, escrow, or deposit, and provides, if the
LLC is suspended, each member of the LLC who is licensed as
a contractor will be liable for up to $1 million in damages
occurring as a result of the licensed activities of the LLC
during the suspension.
ANALYSIS : Existing law, the Beverly-Killea Limited
Liability Company Act, prohibits domestic and foreign
limited liability companies from rendering professional
services in California. (Section 17375 of the Corporations
Code)
Existing law defines "professional services" as "any type
of professional services which 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." (Section
13401(a) of the Corporations Code) Only attorneys,
accountants, and architects have been authorized to render
professional services as limited liability entities in
California.
This bill authorizes the Contractors State License Board to
issue a contractor's license to a limited liability company
provided a qualifying member of the LLC is licensed as a
contractor and the LLC meets all other requirements such as
bonding and solvency of the LLC, and compliance by the LLC
with the liability insurance requirements, as specified.
This bill treats an LLC and a corporation similarly as to
the licensing process, as well as the renewal, suspension,
reissuance, and termination of the license for specified
reasons in the Business and Professions Code.
This bill provides that notwithstanding the prohibition
under the LLC Act against an LLC providing professional
services unless pursuant to a license, certification or
registration, an LLC may render services if the applicable
provisions of the Business and Professions Code authorize a
LLC to hold that license, certificate or registration.
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Background
Generally, an LLC is a legal entity formed under a
statutory scheme (in California, the Beverly-Killea LLC
Act) that allows one or more owners to conduct a business
without any owner having personal liability for the
obligations of the business. The salient nontax
characteristics of an LLC are limited liability for its
owners (as in a corporation) and freedom to structure
management rights and financial interests in the entity in
virtually any configuration the parties wish (as in a
partnership). An LLC most often elects to be treated as a
partnership for income tax purposes, so that the income,
gains, losses, deductions, and credits of the LLC generally
will flow through to its members for reporting on their
personal tax returns, the distribution depending on the
terms of the LLC agreement, not necessarily the ownership
interest of the individual members.
Until the creation of LLCs, the limited partnership and the
subchapter S corporation were the primary forms of business
entity used to achieve the tax status and limited liability
features now offered by the LLC. Each of those forms has
its drawbacks, but the LLC can provide the advantages of
both without the disadvantages of either.
A limited partnership allows pass-through tax treatment,
flexibility in financial structuring, and limited liability
for the partners (as long as they do not take part in the
control of the business), but requires one person (the
general partner) to be fully liable for the obligations of
the business. Unlike a limited partnership, no LLC member
need be personally liable for the company's obligations,
and yet each member is permitted to manage the company and
to take part in the control of the business without losing
the member's limited liability. (Sections 17101 and 17150
of the Corporations Code)
Although an S corporation allows pass-through tax treatment
and limited liability for all owners, S corporation status
limits the parties' flexibility in structuring their
financial arrangements because of the requirements that the
corporation have no more than one class of stock and that
items of income, gain, loss, deduction, or credit be
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distributed among shareholders on a pro rata basis.
Furthermore, only individuals, estates, certain types of
trusts, and certain tax-exempt organizations are permitted
to be S corporation shareholders, and an S corporation will
lose its pass-through tax treatment if an ineligible entity
becomes a shareholder.
An LLC, on the other hand, can have different classes of
ownership, and income, gain, loss, and other items may be
allocated disproportionately to ownership without affecting
the LLC's pass-through tax treatment. Any person can be a
member of an LLC (thus sidestepping the restrictions on
shareholders in the case of an S corporation).
While LLCs may generally engage in any lawful business
activity (except banking, insurance, or trust company
operations), the Beverly-Killea LLC Act prohibits a foreign
or domestic limited liability company from rendering
professional services in this state unless expressly
authorized under applicable provisions of law.
"Professional services" are those services for which a
license, certification, or registration is required under
specified statutes.
In 1995, SB 513 (Calderon), Chapter 679, Statutes of 1995,
authorized the establishment of limited liability
partnerships (LLPs) for licensed attorneys and licensed
accountants, provided the LLP purchased a liability
insurance policy or maintained bank deposits of at least
$100,000 per LLP (or an aggregate of not less than $500,000
for fewer than five partners and not more than $5 million
for all others). Only partnerships with a net worth of $10
million or more were allowed to become LLPs. In 1998, the
statute allowing professional LLPs (Section 16956 of the
Business and Professions Code) was extended to architects,
under the same conditions as accountants and attorneys, for
a trial period of 10 years [AB 469 (Cardoza), Chapter 504,
Statutes of 1998]. In 2006, the repeal date for architects
was extended to 2012, and the liability coverage
requirement was increased to $1 million for partnerships of
five or fewer licensees, and an additional $100,000 per
additional licensee up to a maximum of $5 million. [AB
2914 (Leno), Chapter 426, Statutes of 2006] In 2007, SB
414 (Corbett), Chapter 80, Statutes of 2007) updated the
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liability coverage requirement for accountants and
attorneys to that applicable to architects.
Under the Beverly-Killea LLC Act, unless permitted by the
Business and Professions Code, an LLC cannot provide
professional services. To date, only attorneys,
accountants, and architects are permitted to operate as
LLPs under the conditions specified for liability coverage.
Last year, SB 1225 (Harman), Chapter 114, Statutes of
2008, allowed a private cemetery that is an LLC to operate
as a licensed cemetery authority to own the cemetery and to
provide services by professionals licensed under the
Business and Professions Code. SB 1225, however,
prohibited licensees of professional services rendered in
connection with the operations of a cemetery authority from
having any ownership interest in the LLC.
This bill establishes the rules by which an LLC may provide
services as a licensed contractor.
Prior Legislation
SB 141 (Beverly), Chapter 57, Statutes of 1995, would have
added numerous categories of state regulated professional
service providers to the types of businesses that could
operate as LLCs. However, opponents of the bill and the
bill's sponsor were unable to agree as to whether or not
professional or licensed LLC service providers should carry
adequate insurance to ensure their financial ability to
respond to legal judgments for contract or tort claims.
Consequently, those additional classes of businesses were
amended out of the bill prior to its enactment.
SB 1337 (Correa), 2007-08 Session, was similar to SB 392,
but lacked the insurance and/or escrow deposit requirements
for the LLC and its members. The bill died in the Senate
Judiciary Committee.
AB 2401 (Miller), 1995-96 Session, would have allowed
contractors to operate as LLCs. The bill died in the
Senate Judiciary Committee.
FISCAL EFFECT : Appropriation: Yes Fiscal Com.: Yes
Local: Yes
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According to the Senate Appropriations Committee:
Fiscal Impact (in thousands)
Major Provisions 2009-10 2010-11
2011-12 Fund
LLC contractor $5,397 $5,295
Special*
licensing option
License fees ($14,000)
($14,000) Special*
Secretary of State Unknown costs, supported
by General
existing registration process
* Contractors' License Fund
SUPPORT : (Verified 5/12/09)
Associated General Contractors of California (co-source)
Associated General Contractors - San Diego (co-source)
California Fence Contractors Association
California Landscape Contractors Association
Engineering and Utility Contractors Association
Flasher/Barricade Association
Golden State Builders Exchange
Marin Builders Association
JJA:mw 5/13/09 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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