BILL ANALYSIS
SB 1008
Page 1
Date of Hearing: June 29, 2010
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
SB 1008 (Padilla) - As Amended: April 28, 2010
PROPOSED CONSENT (As Proposed to Be Amended)
SENATE VOTE : 33-0
SUBJECT : ENGINEERING AND LAND SURVEYING: LIMITED LIABILITY
PARTNERSHIPS
KEY ISSUE : SHOULD LICENSED ENGINEERS AND LAND SURVEYORS BE
ALLOWED TO ORGANIZE AND OPERATE AS LIMITED LIABILITY
PARTNERSHIPS (LLP) SO LONG AS THEY PROVIDE SECURITY FOR CLAIMS
AGAINST THE LLP MAINTAINING SPECIFIED LEVELS OF INSURANCE
LIABILITY COVERAGE, CASH RESERVES, AND MINIMUM NET WORTH, AS
SPECIFIED?
FISCAL EFFECT : As currently in print this bill is keyed fiscal.
SYNOPSIS
This bill, sponsored by the American Council of Engineering
Companies of California (ACEC-CA), seeks to authorize licensed
engineers and land surveyors to organize and operate as limited
liability partnerships (LLP). Supporters, most of whom
represent professionals working in the engineering and land
surveying field, contend that the authority sought under this
bill will allow these firms to combine with other firms with
complementary expertise in order to better compete for projects,
and provide desired business flexibility to help manage complex
projects for their clients. Under the LLP statute, the limited
members of an LLP are liable for general partners' acts to the
extent of their investment in the LLP, whereas general partners
of the LLP are liable jointly and severally for all obligations
of the limited partnership. LLP members are not shielded from
personal liability to the extent that members of a limited
liability company (LLC) may be shielded under the
Beverley-Killea LLC Act. This key difference between LLCs and
LLPs may help to explain why California authorizes a handful of
professions-accountants, attorneys, and architects - to render
professional services while operating as a registered LLP, but
never as a LLC. If this bill is signed into law, licensed civil
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engineers and land surveyors would join those ranks authorized
to operate as LLPs in California.
California law currently allows licensed architects, attorneys,
and accountants to organize and operate as registered LLPs, on
the condition that they provide for security for claims against
the LLP by maintaining specified levels of insurance liability
coverage, cash reserves in trust, and minimum net worth. As
proposed to be amended, this bill would raise the liability
coverage requirement from $1.5 million ($1,500,000) to $2
million ($2,000,000) for partnerships of five or fewer
licensees, while maintaining the requirement for an additional
$100,000 per additional licensee up to a maximum of $5,000,000
in security. This bill passed the Senate by a 33-0 vote and
there is no known opposition.
SUMMARY : Seeks to authorize licensed engineers and land
surveyors to organize and operate as limited liability
partnerships, provided that they provide security for claims
against the LLP by maintaining specified levels of insurance
liability coverage, cash reserves in trust, and minimum net
worth. Specifically, this bill :
1)Adds limited liability partnerships (LLP) to the list of
approved organizations that can be formed by civil,
electrical, or mechanical engineers and land surveyors.
2)Includes the practices of engineering and land surveying in
the definitions of "foreign limited liability partnership,"
"registered limited liability partnership," and "professional
limited liability partnership services."
3)Authorizes engineers and land surveyors to organize as LLPs if
certain existing conditions are satisfied.
4)Requires engineers and land surveyors organizing as registered
limited liability partnerships or foreign limited liability
partnerships to provide security for claims by complying with
one, or some combination, of the following:
a) Maintain an insurance policy or policies in the amount
of at least $2,000,000 for five or less licensees rendering
services, with an additional $100,000 for each additional
licensee, and an aggregate limit of liability not to exceed
$5 million;
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b) Maintain in trust or bank escrow, cash, bank
certificates of deposit, U.S. Treasury obligations, bank
letters of credit, or bonds of insurance in the amount of
at least $2,000,000 for five or less licensees rendering
services, with an additional $100,000 for each additional
licensee, and an aggregate limit of liability not to exceed
$5 million;
c) File an annual confirmation with the Secretary of
State's office demonstrating the LLP has a net worth equal
to or exceeding $10 million;
d) Unless the LLP has confirmed its minimum net worth to be
above $10 million, require each partner, by virtue of that
person's status as partner, to personally guarantee payment
of the difference between the maximum amount of security
required and the security otherwise provided.
5)Provides for a 5-year sunset date of January 1, 2016 on which
these provisions will be repealed unless a later enacted
statute that is enacted before that date deletes or extends
the sunset.
EXISTING LAW :
1)Provides that a limited partner is not liable for any
obligation of a limited partnership (including a LLP) unless
named as a general partner in the certificate or, in addition
to exercising the rights and powers of a limited partner, the
limited partner participates in the control of the business.
(Corporations Code Section 15903.03.)
2)Provides that a limited partnership (including a LLP) is
liable for loss or injury caused by the result of a wrongful
act or omission of a general partner acting in the ordinary
course of activities of the limited partnership or with
authority of the limited partnership. (Corporations Code
Section 15904.03.)
3)Provides that general partners of LLPs are jointly and
severally liable for all obligations of the limited
partnership. (Corp. Code Sec. 15904.04.)
4)Defines "foreign limited liability partnership" and
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"registered limited liability partnership" to include
partnerships licensed to engage in the practice of
architecture, public accountancy, or the practice of law.
(Corporations Code Section 16101(6)(A), 16101(8)(A).)
5)Recognizes only registered limited liability partnerships and
foreign limited liability partnerships and provides that
neither entity may render professional LLP services in this
state except through licensed persons. (Corporations Code
Section 16951.)
6)Requires a LLP providing professional LLP services in this
state to comply with all statutory and administrative
registration or filing requirements of the state board,
commission, or other agency that prescribes the rules and
regulations governing the particular profession in which the
partnership proposes to engage, as provided. (Corporations
Code Section 16953(h).)
7)Requires architects and accountants organized as LLPs to
provide security for claims by complying with one, or some
combination, of the following:
a) Maintain an insurance policy or policies in the amount
of at least $1,000,000 for five or less licensees rendering
services, with an additional $100,000 for each additional
licensee, and an aggregate limit of liability not to exceed
$5 million;
b) Maintain in trust or bank escrow, cash, bank
certificates of deposit, U.S. Treasury obligations, bank
letters of credit, or bonds of insurance in the amount of
at least $1,000,000 for five or less licensees rendering
services, with an additional $100,000 for each additional
licensee, and an aggregate limit of liability not to exceed
$5 million;
c) File an annual confirmation with the Secretary of
State's office demonstrating the LLP has a net worth equal
to or exceeding $10 million;
d) Unless the LLP has confirmed its minimum net worth to be
above $10 million, require each partner, by virtue of that
person's status as partner, to personally guarantee payment
of the difference between the maximum amount of security
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required and the security otherwise provided.
(Corporations Code Section 16953(a), paragraphs (1) and
(3).)
8)Does not prohibit civil, electrical, mechanical engineers, or
land surveyors from practicing as a sole proprietorship,
partnership, firm, or corporation, as specified. (Business &
Professions Code Sections 6738, 8729.)
9)Sunsets authority for architects to organize as limited
liability partnerships as of January 1, 2012. (Corp. Code
Sec. 16101(19).)
COMMENTS : This bill, sponsored by the American Council of
Engineering Companies of California (ACEC-CA), seeks to
authorize licensed engineers and land surveyors to organize and
operate as limited liability partnerships (LLP), a privilege
that is currently granted only to limited partnerships of
persons who are licensed to engage in the professions of
architecture, public accountancy, and law.
Author's Stated Need for the Bill. The author states that the
bill is needed for the following reasons:
Existing law does not allow for the formation of limited
liability partnerships providing engineering and land
surveying services. . . . ACEC-CA firms commonly use the
LLP structure in other states and when they try to bring
those business models here, to comply with existing law,
they must completely restructure business relationships and
models.
Allowing engineering and land surveying firms the option to
structure as LLPs will grant parity with related design
professionals (architects) who can currently form LLPs . .
. . and allow these firms to combine with other firms with
complementary expertise in order to better compete for
projects. As the needed infrastructure projects become
more complex, the flexibility of design and construction
firms to adapt is key in being able to effectively deliver
for their clients.
Brief Review of Liability Under the LLP Form of Business
Organization. Generally speaking, a limited liability
partnership form is attractive to businesses because it allows
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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. The one
exception is the general partner, who is liable jointly and
severally for all obligations of the limited partnership.
Members of an LLP are liable for general partner's acts only to
the extent of their investment in the LLP. The distinguishing
characteristic of a 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 judgment against only 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. A limited liability
partnership thus enables the limited partners to share in the
profits of the partnership, but avoid the joint and several
liability of a partnership.
Under the Beverly-Killea LLC Act, a foreign or domestic LLC is
prohibited from rendering professional services in this state
unless expressly authorized. Professional services are those
services for which a license, certification, or registration is
required under specified statutes. The rationale for the
exclusion was that professionals 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.
While LLCs shield their members from personal liability, by
contrast the members of an LLP are liable for general partner's
acts to the extent of their investment in the LLP. Furthermore,
general partners of the LLP are liable jointly and severally for
all obligations of the limited partnership. Under this
rationale, if general partners personally profit when the
partnership profits are distributed, they should remain
personally liable for any judgment against the partnership when
the partnership assets are not sufficient to pay. (Otherwise,
general partnerships could avoid paying liability judgments by
distributing its assets to its partners, leaving only modest
assets in the partnership account to satisfy judgments.) This
key difference between LLCs and LLPs is perhaps one reason why
California authorizes a handful of professions-accountants,
attorneys, and architects - to render professional services
while operating as a registered LLP. If this bill is signed
into law, licensed civil engineers and land surveyors would join
those ranks.
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To mitigate the public's potential concerns over the limitation
of liability, California law requires licensed professionals
organized as an LLP to provide a high level of security for
claims, which is usually accomplished by carrying professional
liability insurance. The LLP can also meet the security
requirements by a combination of insurance, maintaining cash
reserves in trust, and confirmation of minimum net worth.
Liability Coverage Requirements for LLPs Have Been Modified
Several Times in Recent Years. In 1995, SB 513 (Calderon, Ch.
679, Stats. 1995) authorized the establishment of 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 limited liability partner (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 (Business &
Professions Code Section 16956) was extended to architects,
under the same conditions as accountants and attorneys, for a
trial period of ten years (AB 469, Cardoza, Ch. 504, Stats.
1998). In 2006, the repeal date for architects was extended to
2012 and the liability coverage requirement was increased to
$1,000,000 for partnerships of five or fewer licensees, and an
additional $100,000 per additional licensee up to a maximum of
$5,000,000. (AB 2914, Leno, Ch. 426, Stats. 2006.) In 2007, SB
414 (Corbett, Ch. 80, Stats. 2007) updated the liability
coverage requirement for accountants and attorneys to that
applicable to architects. To date, only attorneys, accountants,
and architects are permitted to operate as LLPs, provided that
they meet conditions specified for liability coverage.
Attorneys organized as LLPs have similar requirements with the
following differences: (1) instead of $5 million, the insurance
policy aggregate is not required to exceed $7.5 million; (2)
instead of $5 million, the security amount is not required to
exceed $7.5 million; and (3) instead of $10 million, the LLP may
confirm a net worth equal to or exceeding $15 million.
As proposed to be amended, this bill would raise the liability
coverage requirements for engineers and land surveyors to
$2,000,000. According to insurance and claims data summarized
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by the sponsor, ACEC-CA, and provided to the Senate Judiciary
Committee, the highest claims paid in five of the last 15 years
surveyed exceeded $1 million. The highest were $3.5 million in
2002, $1.45 million in 1995, $1.15 million in 1994, $1,100,000
in 2003, and $1,086,500 in 1998.
The Senate Judiciary Committee noted that liability coverage of
$1,000,000, as originally proposed in this bill, would have
covered only five of the highest claims reported. In order to
address this, the bill was amended in Senate Judiciary to raise
the liability coverage amount from $1 million ($1,000,000) to
$1.5 million ($1,500,000).
To further address the concern, suggested by insurance data,
that higher limits should be imposed on engineers and land
surveyors, the author now proposes to amend this bill to raise
the liability coverage requirement from $1.5 million
($1,500,000) to $2 million ($2,000,000) for partnerships of five
or fewer licensees, while maintaining the requirement for an
additional $100,000 per additional licensee up to a maximum of
$5,000,000. Consistent with existing law and past changes to
these amounts, the liability coverage amount is the same whether
satisfied by an insurance policy or by cash reserve in trust.
The suggested amendment reads as follows:
Page 18, lines 39 to 40, delete "one million five hundred
thousand dollars ($1,500,000)" and insert "two million
dollars ($2,000,000)"
Page 19, lines 37 to 39, delete "one million five hundred
thousand dollars ($1,500,000)" and insert "two million
dollars ($2,000,000)"
PREVIOUS RELATED LEGISLATION: SB 414 (Corbett), Chapter 80,
Statutes of 2007, increased the minimum amount of insurance
required of LLP firms registered for the practice of public
accountancy or law from $500,000 to $1 million.
AB 2914 (Leno), Chapter 426, Statutes of 2006, extended the
sunset date on licensed architects' ability to organize as LLPs
to January 1, 2012, and increased the minimum liability coverage
requirements for architectural LLPs to $1 million (from
$500,000) as of January 1, 2008.
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AB 180 (Horton) of 2005 would have authorized, until January 1,
2009, engineers and land surveyors to operate within their scope
of registration, and to conduct business as a LLP similar to
that of architects, certified public accountants and attorneys,
and to be designated as a registered LLP or a foreign LLP, and
specifies the level of liability insurance or security the LLPs
are required to maintain. This bill was amended to address an
unrelated issue.
AB 1265 (Benoit) of 2003 would have authorized engineers and
land surveyors to organize and operate as a LLP with the same
insurance liability coverage requirements as that of architects.
AB 1265 was held in the Senate Judiciary Committee.
AB 1596 (Shelley), Chapter 595, Statutes of 2001 extended the
sunset date for architects to form a LLP from January 1, 2002,
until January 1, 2007.
AB 469 (Cardoza), Chapter 504, Statutes of 1998, permitted
architects to organize and operate as a LLP when the partnership
meets specified insurance requirements.
SB 513 (Calderon), Chapter 679, Statutes of 1995, authorized
licensed accountants and licensed attorneys to organize and
operate as a LLP when the partnership meets specified insurance
requirements.
REGISTERED SUPPORT / OPPOSITION :
Support
American Council of Engineering Companies (ACEC) (sponsor)
American GI Forum of California
Amersoft International
Asian Business Association
Asian Indian Association of America
CalChamber
California Business Properties Association
California Hispanic Chambers of Commerce
California Land Surveyors Association
Century Diversified, Inc.
CMTS, Inc.
Emergintec, LLC
Golden State Management Services
Greater Los Angeles Chapter of the Society of Hispanic
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Professional Engineers, Inc.
Green America Public-Private Partnership
Hernandez, Kroone & Associates
Hispanic Contractors Association
La Raza Roundtable
Latino Business Chamber of Greater Los Angeles
Latino Institute for Corporate Inclusion
League of United Latin American citizens
Lista Design Studio
NCA (National Concilio of America)
Testing Services & Inspection, Inc.
Valle & Associates
W2 Design, Inc.
Yang Management
Yerba Buena Engineering and Construction
Opposition
None on file
Analysis Prepared by : Anthony Lew / JUD. / (916) 319-2334