BILL ANALYSIS
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|SENATE RULES COMMITTEE | SB 392|
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UNFINISHED BUSINESS
Bill No: SB 392
Author: Florez (D)
Amended: 6/23/10
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
SENATE FLOOR : 36-0, 5/18/09 (Consent)
AYES: Aanestad, Alquist, Ashburn, Benoit, Calderon,
Cogdill, Corbett, Correa, Cox, Denham, DeSaulnier,
Ducheny, Dutton, Hancock, Harman, Hollingsworth, Huff,
Kehoe, Leno, Liu, Lowenthal, Maldonado, Negrete McLeod,
Oropeza, Padilla, Pavley, Runner, Simitian, Steinberg,
Strickland, Walters, Wiggins, Wolk, Wright, Wyland, Yee
NO VOTE RECORDED: Cedillo, Florez, Romero, Vacancy
ASSEMBLY FLOOR : 75-0, 8/26/10 - See last page for vote
SUBJECT : Limited liability companies: licensed
contractors
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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
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.
Assembly Amendments require the LLCs authorized by this
bill to maintain a policy or policies of insurance against
liability imposed on or against it for damages arising out
of claims, and require, as a condition precedent to the
issuance, reissuance, reinstatement, reactivation, renewal,
or continued valid use of a limited liability company
license, that the applicant or licensee file or have on
file a surety bond in the sum of $100,000 for damages
arising out of specified claims of employees, and make
other technical changes.
ANALYSIS : Existing law, the Beverly-Killea Limited
Liability Company Act, prohibits domestic and foreign LLCs
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
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professional services as limited liability entities in
California.
This bill:
1. Includes LLC within the definition of "person" for the
purposes of the Contractors State License Law
(Contractors Law).
2. Defines "qualifying person," "qualifying individual," or
"qualifier" as an individual who qualifies for a
contractor's license.
3. Authorizes the issuance of a contractor's license to an
LLC, and adds license requirements that mirror those of
a corporation.
4. Requires an LLC to provide security for claims with at
least one of the following:
A. The total aggregate limit of liability under the
policy or policies of insurance for a limited
liability company that employs five or fewer licensed
persons shall not be less than $1 million, and for an
LLC that employs more than five licensees rendering
professional services on behalf of the company, an
additional $100,000 of insurance shall be obtained
for each licensee except that the maximum amount of
insurance is not required to exceed $5 million in any
one designated period. Defines "designated period" to
mean a policy year or period less than 12 months.
B. Maintain in trust or bank escrow, cash, bank
certificates of deposit, United States Treasury
obligations, bank letters of credit, or bonds of
insurance or surety companies as security for payment
of liabilities imposed by law for damages arising out
of all claims. The maximum amount of security for an
LLC that employing up to five licensed persons shall
not be less than $1 million. For each additional
licensee employed beyond five licensees, an
additional $100,000 of security shall be obtained up
a maximum of $5 million.
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C. At the time of licensing, an LLC shall file with
the registrar all necessary information and
documentation demonstrating compliance with the
financial security requirements.
D. If the security requirements of this section are
satisfied wholly, or in part, with an insurance
policy, then a certification of coverage shall be
submitted to the commissioner by the licensee or
applicant, and signed by an authorized agent or
employee of the insurer.
5. Requires that if an LLC license is suspended, each
person within the company identified shall be personally
liable up to $1 million for damages against third
parties in connection with the company's performance
during the period of suspension, for any act or contract
where a license is required.
6. Requires that if an LLC license has been suspended or
revoked, but stayed, the applicant or licensee must file
or have on file a contractor's bond in a sum fixed by
the registrar. The sum shall not be less than $15,000
or more than 10 times that amount.
7. Requires that the qualifying individual for an LLC shall
not be required to file or have on file a qualifying
individual's bond if he/she owns at least a 10 percent
interest in the LLC and certifies this fact on a form
prescribed by the registrar.
8. Requires an LLC to include information of the liability
insurance or security it maintains at a financial
institution for change orders and service and repair
contracts.
9. Requires the Contractors State License Board (CSLB) to
require as a condition precedent to the issuance,
reissuance, reinstatement, reactivation, renewal, or
continued valid use of an LLC license, that the
applicant or licensee file or have on file a surety bond
in the sum of $100,000, as specified.
10.Requires an LLC to obtain a Certificate of Liability
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Insurance, by an authorized agent or employee of the
insurer, and requires the insurer to submit specified
information to CSLB.
11.Authorizes CSLB to post on the Internet the name of the
insurers providing the liability policies, the policy
numbers, and the sum of each aggregate limit of
liability, of active LLC licensees.
12.Requires CSLB to begin processing applications for
licensure from LLCs by January 1, 2012.
13.Defines "members of the personnel of record" to mean
every person listed in the records of the registrar as
then associated with a licensee.
14.Makes other technical and conforming changes.
15.Makes legislative findings and declarations.
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
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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
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.
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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
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
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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
According to the Assembly Appropriations Committee, the
Franchise Tax Board estimates that the contractors
establishing LLCs and paying the $800 annual LLC tax
would result in an additional $8.4 million in revenue for
2011-12, growing to $11 million in 2012-13. The CSLB
anticipates between 500 and 700 initial applications for
the new LLC license category. Workload and automation
costs associated with these applications and creating the
new category would be approximately $65,000 per year for
the first two years. The revenue increase associated
with the new licenses would more than offset the costs.
SUPPORT : (Verified 8/25/10)
Associated General Contractors of California (co-source)
Associated General Contractors - San Diego (co-source)
Associated Builders and Contractors of California
California Fence Contractors Association
California Landscape Contractors Association
Engineering and Utility Contractors Association
Engineering Contractors Association
Flasher/Barricade Association
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Golden State Builders Exchange
Marin Builders Association
State Building and Construction Trades Council
ASSEMBLY FLOOR :
AYES: Adams, Ammiano, Anderson, Arambula, Bass, Beall,
Bill Berryhill, Tom Berryhill, Block, Blumenfield,
Bradford, Brownley, Buchanan, Caballero, Charles
Calderon, Carter, Chesbro, Conway, Cook, Coto, De La
Torre, De Leon, DeVore, Eng, Evans, Feuer, Fletcher,
Fong, Fuentes, Fuller, Furutani, Gaines, Galgiani,
Garrick, Gatto, Gilmore, Hagman, Hall, Harkey, Hayashi,
Hernandez, Hill, Huber, Huffman, Jeffries, Jones, Knight,
Lieu, Logue, Bonnie Lowenthal, Ma, Mendoza, Miller,
Monning, Nava, Nestande, Niello, Nielsen, V. Manuel
Perez, Portantino, Ruskin, Salas, Saldana, Silva,
Skinner, Smyth, Solorio, Audra Strickland, Swanson,
Torlakson, Torres, Torrico, Villines, Yamada, John A.
Perez
NO VOTE RECORDED: Davis, Norby, Tran, Vacancy, Vacancy
JJA:mw 8/27/10 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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