BILL ANALYSIS
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|Hearing Date:April 5, 2010 |Bill No:SB |
| |1008 |
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SENATE COMMITTEE ON BUSINESS, PROFESSIONS
AND ECONOMIC DEVELOPMENT
Senator Gloria Negrete McLeod, Chair
Bill No: SB 1008Author:Padilla
As Amended:March 15, 2010 Fiscal:Yes
SUBJECT: Engineering and land surveying: limited liability
partnerships.
SUMMARY: Authorizes engineers and land surveyors to operate within
their scope of licensure, and to conduct business as a limited
liability partnership (LLP) similar to that of architects, certified
public accountants and attorneys, and to be designated as a registered
LLP or a foreign LLP.
Existing law, the Business and Professions Code:
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.
2) Allows one or more civil engineer, electrical engineer, mechanical
engineer, or land surveyor to practice or offer to practice within
the scope of their registration as a sole proprietorship,
partnership, firm, or corporation if specified requirements are
met.
Existing law, the Corporations Code:
3) Provides for the formation of various types of legal entities,
including corporations, limited liability companies, partnerships,
limited partnerships, and limited liability partnerships.
4) 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
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engage in the practice of architecture, public accountancy, or the
practice of law.
5) 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, or the practice of law.
6) Sunsets as of January 1, 2012 statutes permitting architects to
form a foreign LLP or registered LLP for the practice of
architecture.
7) Defines "professional LLP services" as the practice of
architecture, the practice of public accountancy, or the practice
of law.
8) Requires a registered LLP or foreign LLP offering accountancy,
legal or architectural services to provide security as specified
against claims based upon acts, errors, or omissions arising out of
the practice of these professions.
9) Provides as an option for providing security for claims that the
accountants, attorneys or architects 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 or fewer
licensees of not less than $1,000,000, 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 accountants or architects
and $7,500,000 for LLPs formed by attorneys in any one designated
period.
This bill:
1) Authorizes a civil engineer, electrical engineer, mechanical
engineer, or land surveyor to practice or offer to practice within
the scope of their registration as an LLP.
2) Authorizes a foreign LLP and a registered LLP to be formed for the
practice of engineering and the practice of land surveying, and
provides that engineers or land surveyors are not prohibited from
practicing or offering to practice, within the scope of their
registration, as an LLP.
3) Imposes the security requirements on an LLP and foreign LLP
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providing engineering or land surveying services, equivalent to the
requirements for architects. Specifically, an LLP offering
engineering or land surveying services must obtain either one, or
an aggregate of the following:
a) A policy or policies of insurance against liability imposed on
or against it by law for damages arising out of claims in an
amount for each claim and in the annual aggregate of at least
$1,000,000. The policy or policies may be issued on a
claims-made or occurrence basis as specified.
b) Security for payment of liabilities in trust or bank escrow,
cash, bank certificates of deposit, United States Treasury
obligations, bank letter of credit, or bonds of insurance or
surety companies in an amount of at least one million dollars
($1,000,000).
1) Provides that, in lieu of the requirement specified in #3) above,
an LLP may file a confirmation with the California Secretary of
State that the LLP has a net worth equal to or greater than
$10,000,000.
2) Provides that each partner, except for a partnership that satisfies
#4) above, by virtue of his or her status as a partner, is liable
for the difference should the LLP's insurance fall short of the
minimum insurance requirements.
3) Strikes obsolete provisions out of the law relating to LLP's, and
makes technical and conforming changes.
FISCAL EFFECT: Unknown. Legislative Counsel has keyed this bill as
"fiscal."
COMMENTS:
1. Purpose. This bill is sponsored by the American Council of
Engineering Companies (ACEC) to extend the authority to arrange as
a limited liability partnership to engineering and land surveying
firms.
According to the Author "Extending LLP authority to engineering and
land surveying firms addresses a quirk in existing law which allows
architects, attorneys, and accountants to organize as a LLP but not
engineers or land surveyors. LLP's have been common practice in
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California for lawyers, accountants and architects."
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 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. Under the Beverly-Killea Limited Liability
Company (LLC) Act, a foreign or domestic limited liability company
is prohibited 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.
The rationale for the exclusion was 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 or limited
liability partnership (LLP) and thus become potentially
judgment-proof.
4. Related Legislation. SB 392 (Flores) of 2009 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 in a trust or escrow account. That bill is awaiting
hearing in the Assembly Judiciary Committee.
AB 180 (Horton) of 2005 was nearly identical to SB 1008; however, it
established a January 1, 2009 sunset date on its provisions. That
bill passed this Committee 4-0. The bill was ultimately amended to
become another bill.
AB 1265 (Benoit), in the 2003-2004 Session, would have permitted
professional engineers and land surveyors to organize as an LLP and
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would have required the same insurance liability coverage as that
of architects. This bill was passed out of this Committee with a
7-0 vote. However, it was held in the Senate Judiciary Committee.
The major concern expressed by the Judiciary Committee was that the
proposed levels of liability insurance may not be adequate to cover
certain claims against engineer or land surveyors.
AB 2914 (Chaper 426, Statutes of 2006) further extended the sunset
date for architects to organize as LLPs to January 1, 2012.
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 Sponsor of this bill ACEC, along with
the California Business Properties Association and the California
Chamber of Commerce who support this measure, argue that the
authority to organize as an LLP under this bill will offer unique
project delivery opportunities and allow for the creation of
specialty partnerships to deliver infrastructure projects in
California. They state the bill will encourage the expansion of
business practices while bringing California into parity with the
vast majority of other states which allow professional services to
be engaged in these business structures. The proponents further
suggest, "As California attempts to claw its way out of the worst
recession in decades, providing options to business makes sense.
Allowing engineering and land surveying firms the option to
structure as LLP's will provide additional flexibility that will
encourage business expansion in some instances, while boosting
project delivery options."
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? AB 469, Chapter 504,
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Statutes of 1998, permitted architects to form an LLP, provided
that the partnership had between $500,000 and $5 million in
insurance depending on the number of partners in the LLP. It also
provided that the provisions allowing architects to form LLPs would
sunset on January 1, 2002. AB 1596, Chapter 595, Statutes of 2001,
extended the sunset date of statutes permitting architects to form
LLPs to January 1, 2007. This bill was originally attempting to
eliminate the January 1, 2002 sunset date entirely. However, when
this bill was heard in the 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.
Because of this incomplete data, it was agreed to grant an
extension of the sunset date for five years, to January 1, 2007.
AB 2914 (Chapter 426, Statutes of 2006) further extended the sunset
date for five years, to January 1, 2012.
Staff recommends that if a five-year sunset date is to be considered,
that the bill be amended to include a January 1, 2016 sunset date
on the authority for engineers and Land surveyors to form LLPs.
On page 10, between lines 36 and 37, insert:
(20) The provision of the practice of engineering and the
practice of land surveying as a professional limited liability
partnership service permitted by this section shall extend only
until January 1, 2016.
NOTE : Double-referral to Judiciary Committee (second.)
SUPPORT AND OPPOSITION:
Support:
American Council of Engineering Companies (Sponsor)
California Business Properties Association
California Chamber of Commerce
Opposition: None received as of March 30, 2010
Consultant:G. V. Ayers
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