BILL ANALYSIS �
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2011-2012 Regular Session
SB 1077 (Price)
As Introduced
Hearing Date: April 24, 2012
Fiscal: Yes
Urgency: No
RD:rm
SUBJECT
Alarm Companies: Limited Liability Companies
DESCRIPTION
This bill would, among other things, allow a limited liability
company (LLC) to be issued an alarm company operator's license.
BACKGROUND
Under the Beverly-Killea Limited Liability Company Act (the LLC
Act) (SB 469 (Beverly, Killea, Ch. 1200, Stats.1994)), a foreign
or domestic limited liability company (LLC) is prohibited from
rendering professional services in this state unless expressly
authorized under applicable provisions of law. (See Corp. Code
Secs. 17375, 17002(c).) Professional services include those
services for which a license, certification, or registration is
required under specified statutes.
Generally, a limited liability company is a legal entity 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
(more)
SB 1077 (Price)
Page 2 of ?
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 "limited" partners (as long as they do not take part in the
control of the business), but requires at least one person (the
"general" partner) be fully liable for the obligations of the
business. In contrast, no member of an LLC is required to 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. (Corp. Code Secs. 17101, 17150.) (In the
corporation context, a shareholder retains limited liability
similar to that of an LLC member, but cannot participate in the
day to day management of the company.)
Although an S corporation allows pass-through tax treatment and
limited liability for its owners, S corporation status limits
the parties' flexibility in structuring their financial
arrangements. Furthermore, only limited persons and entities
can 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).
To date, only contractors, private cemeteries, and repossessors
have been permitted to operate as LLCs. In 2008, SB 1225
(Harman, Ch. 114, Stats. 2008), authorized private cemetery
LLCs, however, it also prohibited licensees of professional
services rendered in connection with the operations of a
cemetery authority from having any ownership interest in the
LLC. In 2009, SB 392 (Florez, Ch. 698, Stats. 2009) authorized
LLCs to be issued contractors' licenses, imposed specified
conditions for liability coverage, as did those bills that
authorized attorneys, accountants, architects, engineers and
land surveyors to operate as the only LLPs in California.
SB 1077 (Price)
Page 3 of ?
Notably, a bill similar to SB 392 was introduced in 2008 but
lacked the insurance and/or escrow deposit requirements for the
LLC and its members. That bill died in this Committee. (SB
1337 (Correa, 2008).)
This bill would, among other things, allow for an LLC to be
issued an alarm company operator's license, as is permitted in
49 other states. The bill does not contain any specified
conditions for liability coverage typically seen in LLC and LLP
bills before this Committee. This bill passed the Senate
Business, Professions and Economic Development Committee on a 9
- 0 vote.
CHANGES TO EXISTING LAW
Existing law , the Beverly-Killea LLC Act, prohibits domestic and
foreign limited liability companies from rendering professional
services, as defined, in California. (Corp. Code Sec. 17375.)
Existing law provides that notwithstanding this Section 17375,
an LLC may render services that may be lawfully rendered only
pursuant to a license, certificate, or registration authorized
by the Business and Professions Code if the applicable
provisions of the Business and Professions Code authorize a
limited liability company to hold that license, certificate, or
registration. (Corp. Code Sec. 17002(c).)
Existing law defines professional service is defined as those
services that may only be lawfully rendered pursuant to a
license, certification, or registration under the Business and
Professions Code, Chiropractic Act, Osteopathic Act, or Yacht
and Ship Brokers Act. (Corp. Code Secs. 13401, 13401.3.)
Existing law provides that no member of an LLC shall be
personally liable under any judgment of a court, or in any other
manner, for any debt, obligation, or liability of the limited
liability company, whether that liability or obligation arises
in contract, tort, or otherwise, solely by reason of being a
member of the limited liability company, except as specified.
(Corp. Code Sec. 17101(a).) Existing law provides that a member
may otherwise agree to be personally obligated for any or all
debts, obligations, and liabilities of the LLC in writing in the
articles of incorporation or written operating agreement, as
specified. (Corp. Code Sec. 17101(e).)
Existing law provides that no person who is a manager or officer
or both a manager and officer of an LLC is personally liable for
SB 1077 (Price)
Page 4 of ?
any debts, judgments, or obligations of the LLC. Existing law
provides that a manager may, however, agree to be personally
liable if such agreement is set out in the LLC's articles of
organization or other writing. (Corp. Code Sec. 17158.)
Existing law defines "manager" as a person elected by the LLC
members to manage the LLC if the articles of organization
contain a specified statement, or, if the articles of
organization do not contain that statement, "manager" means each
of the members of the limited liability company. (Corp. Code
Sec. 17001(w).) Managers selected as such, may, but need not be
members. (Corp. Code Sec. 17151(a).)
Existing law establishes the Alarm Company Act which provides
for the licensure, registration, and regulation of alarm company
operators and alarm agents by the Bureau for Security and
Investigative Services (BSIS). (Bus. & Prof. Code Sec. 7590 et
seq.) Existing law provides that a licensee includes a business
entity, whether an individual, partnership, or corporation
licensed under the Alarm Company Act. (Bus. & Prof. Code Sec.
7590(i).)
Existing law permits the director of Consumer Affairs to deny a
license, certificate, or registration regulated by the Alarm
Company Act on specified grounds, including, among other things,
that the applicant has been an officer, partner, or manager of
any person who has been refused a license under this chapter or
whose license has been suspended or revoked. (Bus. & Prof. Code
Sec. 7590.10(a)(7).)
This bill would authorize an LLC to hold an alarm company
operator license under the Business and Professions Code.
This bill would add that the director of Consumer Affairs may
deny a license, certificate, or registration regulated by the
Alarm Company Act on the grounds that the applicant was a
managing member who has been refused a license, as specified, or
whose license has been suspended or revoked.
This bill would, among other things, provide that the chief of
BSIS or his or her designee may issue a citation, as specified,
against a person who is not otherwise exempt under the Alarm
Company Act and is acting or offering to act in the capacity of
the licensee, registrant, permitholder, or certificate holder
without a valid license, registration, permit or certificate, as
applicable, under this Act.
SB 1077 (Price)
Page 5 of ?
This bill would require that a citation meet specified
requirements, including, among other things, that it shall
inform the cited person that if he or she desires a hearing to
contest the finding of a violation, that the hearing shall be
requested by written notice to the BSIS within 30 days of the
issuance of the license.
This bill would prescribe factors that the chief of BSIS or his
or her designee must consider in setting the administrative fine
for the citation and would also specify abatement-related
procedures and timelines.
COMMENT
1. Stated need for the bill
According to the author:
Under the B&P Code, several professional businesses are
prohibited from becoming LLC's. The prohibition stems from
broad language in the Corporations Code that was originally
targeted at keeping law firms and accounting firms from
becoming LLC's. These professions are now allowed to become
Limited Liability Partnerships (LLP). However, the original
language prohibiting other licensed professions to become
LLC's still remains. �The California Alarm Association]
believes this language is outdated and was adopted before many
professional companies, such as alarm companies, began
organizing as LLC's. Forty-nine other states allow alarm
companies to organize as LLC's. Consumers will still be able
to sue alarm companies organized as LLC for damages in the
rare cases where disputes arise.
The bill also authorizes an alarm company to keep the same
alarm license if it changes its business structure. This
would allow an alarm company organized as a corporation to
convert its organizational structure to an LLC, and allow the
license to be transferred to the new business structure. This
change in law will save alarm companies and the BSIS, which
regulates and licenses alarm companies, from unnecessary work
that would otherwise be necessary when applying for a new
alarm company license. A similar change in code has been made
for the repossesser industry (c.f. Bus. & Prof. Code Sec
7503.9).
Under current law the BSIS lacks the direct authority to
SB 1077 (Price)
Page 6 of ?
regulate unlicensed alarm companies. When discovering an
alarm company is operating illegally without a proper license,
the BSIS must rely on the local District Attorney �DA] to
enforce the Alarm Act. Securing the support of the local DA
is difficult, as they often have more pressing issues to deal
with. Granting the BSIS direct authority to deal with
unlicensed alarm companies �, as this bill would do,] will be
more efficient and effective in preventing unfair competition
in the market place. More importantly, it will also provide
greater protection for consumers who may be victimized by
unscrupulous alarm companies operating without the proper
license and without the background review conducted by the
BSIS as a condition of receiving an alarm company license.
2. Longstanding concerns with limited liability
This bill would allow an LLC to be provided an alarm company
operator license, which is regulated under the Alarm Company Act
found in Business and Professions Code Section 7590 et seq.
According to the proponents of this bill, LLCs in all other
states already have this authority.
The Beverly-Killea LLC Act prohibits LLCs in California from
rendering professional services for which a license,
registration, or certification is required. This issue was
heavily debated in SB 469 (Beverly, Killea, 1994) and its
trailer bill, SB 141 (Beverly, 1996). That debate centered on
whether 54 categories of professional service providers should
be authorized to operate as "LLCs" without any particularized
showing of need. Another issue was whether the "professional
service" LLC should be required to carry some specified level of
insurance as a condition of becoming an LLC.
The rationale for the exclusion of professional services from
the business that an LLC may undertake has been 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, potentially become judgment proof. In other words,
because of the limited liability attributes of an LLC, a
claimant injured by a person operating as an LLC could no longer
collect a claim against the person's personal assets. The
insurance requirement was suggested as a compromise to ensure
some recovery by the injured party should the LLC business have
little or no assets because the profits are regularly
distributed to its members.
SB 1077 (Price)
Page 7 of ?
In the years since, numerous professionals and licensees have
sponsored their own bills to allow them to operate as "limited
liability partnerships" as long as they meet certain insurance
requirements. (See e.g. SB 513 (Calderon, Ch. 679, Stats.
1995); AB 469 (Cardoza, Ch. 504, Stats. 1998).) As was seen
with LLPs, in recent years California LLC law attempted to
strike a similar balance between allowing professional licensed
service providers to operate in a mode offering both tax and
liability-limiting advantages while preserving to an appropriate
degree the ability of a party injured by professional negligence
to recover damages for that injury. Specifically, with respect
to private cemeteries and contractors, an insurance requirement
has been imposed upon professional licensees wishing to operate
as an LLC. Only once was a bill passed allowing a professional
service provider to form as an LLC without similar insurance
requirements: repossessors. Committee staff, however, notes
that the bill which allowed for LLCs to hold the license of
repossession agencies was not heard before this Committee. (See
SB 1595 (Lee, Ch. 505, Stats. 1995).)
To ensure adequate, though not necessarily complete recovery, in
all claims, the insurance requirement is added as a condition of
being able to operate as an LLP or LLC. Thus, even where the
LLC has few assets because the profits are regularly distributed
to its members, the required insurance would be available to pay
tort damages.
3. Insurance requirement should be added
This bill does not provide for any insurance to be maintained by
an LLC that is issued an alarm company operator's license. Even
assuming the stringent regulation of these licensees as a whole,
as seen with many professionals and licensees, harm can result
to consumers as a result of negligent acts or omissions, even by
good actors. The potential for harm by alarm companies, while
minimized in some respects due to background checks and other
licensing requirements made of these companies and their
employees, is not unthinkable. Indeed, negligent or reckless
mistakes could result in substantial property and bodily harm to
consumers which are difficult to quantify in abstract.
Current law authorizes attorneys, accountants, and architects,
all of whom provide professional services under the Business and
Professions Code, to organize themselves as LLPs and to provide
professional services, so long as the LLP maintains a net worth
SB 1077 (Price)
Page 8 of ?
of at least $10 million, and obtains liability insurance
coverage or maintains bank deposits of $1 million for
partnerships of five or fewer licensees and an additional
$100,000 for each additional licensee up to a maximum of $5
million for all others. These figures were updated for lawyers
and accountants in 2007 by SB 414 (Corbett, Ch. 80, Stats.
2007). The authorization for architects or organize as LLPs was
reviewed last year in this Committee, during its sunset review,
in order to review the adequacy of their insurance levels and
the removal of the sunset date. (See AB 560 (Gorrell, Ch. 291,
Stats 2011; it was determined in this Committee that the
availability of claims information was sufficient to extend, but
not delete, the sunset and to maintain the current insurance
levels.)
In 2009, SB 392 (Florez, Ch. 698, Stats. 2009) was enacted to
authorize the State Contractors' License Board to issue to an
LLC a license to provide contactor services, if the LLC met the
liability coverage requirements provided in the bill (and met
other licensing requirements). The year prior to that, SB 1337
(Correa) would have done the same, but without requiring the LLC
to provide any additional liability coverage in the event of
damages to a consumer. That bill died in this Committee. In
that same session, SB 1225 (Harman, Ch. 114, Stats. 2008)
permitted an LLC to obtain a license as a cemetery authority
provided it conformed to the insurance requirements for
professional LLPs and provided no licensee practicing his or her
profession becomes an owner-member of the LLC.
As mentioned in Comment 2 above, LLCs protect owners from
liability to consumers yet allow them full control to operate
and manage the business and distribute profits as they wish.
Because alarm companies, like contractors, provide services to
both small homes and large public and private entities to
protect against burglary and other potentially violent, if not
heinous, crimes, an incompetent or negligent alarm company
operator could just as easily wreak havoc on a consumer's life,
with the consumer having no recourse if something goes wrong.
Thus, without the insurance coverage now provided under SB 392
in this bill for an LLC with an alarm company operator's
license, such protection would not exist for the consumer. The
following amendment addresses this issue.
Suggested amendment :
Require that an alarm company operator-LLC obtain and maintain
SB 1077 (Price)
Page 9 of ?
a minimum of $1 million in an insurance policy, or place on
deposit or escrow $1 million dollars, 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.
4. Liability of LLC members in the event of suspension
This bill is silent as to what happens in the event that the LLC
does not maintain the insurance requirements. With respect to
other professionals allowed to exist as limited liability
entities, non-compliance with the insurance or escrow deposit
requirements has triggered the suspension of the LLC's
contractor's license. (See e.g. SB 392 (Florez, Ch. 698, Stats.
2009).) With respect to LLCs issued contractors' licenses in SB
392, where such suspension was triggered, each member would be
held liable up to $1 million for damages or injuries resulting
from acts and omissions of the LLC in providing contracting
services.
This additional coverage for liability is required for the
benefit of damaged consumers who would otherwise have no
recourse if an injury occurs during the time of suspension. In
the case of a sole proprietor, a damaged consumer may attempt
recourse against the alarm company operator's personal assets.
The consumer has similar recourse against a partner in the case
of a partnership, or a general partner in case of a limited
partnership. In the event that the alarm company operator is a
corporation, the consumer could go after the corporate assets,
or try to pierce the corporate veil to reach the shareholders'
assets. There is a long line of cases allowing the corporate
veil to be pierced to remedy wrongs inflicted by corporations on
others.
Under the Beverly-Killea LLC Act, no person who is a manager or
officer or both a manager and officer of an LLC is personally
liable for any debts, judgments, or obligations of the LLC. A
manager may however agree to be personally liable if this is set
out in the LLC's articles of organization or other writing.
(Corp. Code Sec. 17158.) As to the personal liability of other
members of the LLC, the LLC Act also provides similar protection
against their personal liability. (Corp. Code. Secs. 17101(a),
(e).) Committee staff notes that even though existing law does
specify that an LLC member shall be subject to liability under
the common law governing alter ego liability, and shall also be
personally liable pursuant to a court judgment or for any debt,
obligation, or liability of the LLC under the same or similar
SB 1077 (Price)
Page 10 of ?
circumstances and to the same extent as a corporate shareholder
for any debt, obligation, or liability of a its corporation,
except as specified, existing law is silent as to whether this
applies to an LLCs managers as well. (Corp. Code Sec.
17101(b).)
Moreover, existing law also provides that nothing in Section
17101 shall be construed to affect the liability of a member of
a limited liability company (1) to third parties for the
member's participation in tortious conduct, or (2) pursuant to
the terms of a written guarantee or other contractual obligation
entered into by the member, other than an operating agreement.
The case law here is still sparse, and, regardless, piercing the
veil can be very difficult to do in such a relatively new area,
and would only burden the already-harmed consumer even more in
order to get the recovery that he or she would otherwise be
entitled to.
Again, as outlined in the Background, these owners are persons
who benefit from the tax advantages as well as from the shield
provided to their personal assets in the course of managing
their business with much less formalities than a corporation,
and with the ability to manage the company, and it is not clear
that they can be reached to remedy wrongs they have done to
consumers. Whereas SB 392 would have removed any uncertainty by
making the members liable for up to $1 million in damages during
the period when the LLC is in suspension, this bill contains no
such provisions. The following amendment addresses this issue.
Suggested amendment :
Add language to provide that an LLC which does not maintain
the sufficient levels of insurance under law would be
suspended, and that the members of the LLC shall be personally
liable up to $1 million each for damages resulting to third
parties in connection with the company's performance, during
the period of suspension, of any act or contract where a
license is required by the Alarm Company Act.
5. Sunset provision should be added
As discussed in the comments above, the historic concerns with
adding a licensed profession to the list of authorized LLPs and
LLCs in this state are substantially similar and necessitate
that information, including claims information and other
relevant data, be provided to this Committee to both demonstrate
SB 1077 (Price)
Page 11 of ?
the appropriateness and need for LLC or LLP status, and to
provide the evidence relevant to the issue of adequacy of
insurance levels. Insurance and sunset requirements have been
vital components in the ability of this Legislature to strike a
balance between allowing professional licensed service providers
to operate in a mode offering tax and liability-limiting
advantages and preserving, to an appropriate degree, the ability
of a party injured by professional negligence to recover damages
for that injury.
Specifically, the inclusion of sunsets in these statutes
authorizing new professionals or licensees to operate as LLCs or
LLPs helps to assure an opportunity for the Legislature to
reevaluate the appropriateness of the LLC status and the
conditions upon which that status is granted, and specifically
whether the insurance levels were adequate to compensate claims
and judgments made against the LLC. In other words, sunset
dates placed on new LLCs or LLPs ultimately aid in ensuring that
consumers will not be left without the ability to recover for
the harm they have suffered as a result of any debts,
obligations, or liabilities of those entities.
The recognized need for sunsets is reflected in the history of
numerous LLP related bills. Sunsets have been required for
architects, starting with AB 469 (Cardoza, Ch. 504, Stats. 1998)
and through AB 560 (Gorell, Ch. 291, Stats. 2011), including two
additional bills in between. Likewise, SB 1008 (Padilla, Ch.
634, Stats. 2010) authorized licensed engineers and land
surveyors to organize and operate as LLPs, with a sunset
provision included, in addition to specified insurance
requirements. The following amendment would add a sunset to
this bill as well.
Suggested Amendment :
Include a three-year sunset in the bill.
Support : None Known
Opposition : None Known
HISTORY
Source : California Alarm Association
SB 1077 (Price)
Page 12 of ?
Related Pending Legislation : None Known
Prior Legislation :
SB 560 (Gorell, Ch. 291, Stats. 2011) extended the sunset for
architecture LLPs to January 1, 2019, under the continuation of
the insurance levels required in AB 1596 (Shelley, Ch. 595,
Stats. 2001). The bill, as introduced, proposed to remove the
sunset entirely.
SB 1008 (Padilla, Ch. 634, Stats. 2010) authorized licensed
engineers and land surveyors to organize and operate as LLPs, as
specified, and requires engineers and land surveyors organizing
as LLPs to carry insurance liability coverage, as specified.
This authorization is set to sunset on January 1, 2016.
SB 392 (Florez, Ch. 698, Stats. 2009), See Background and
Comment 3.
SB 1337 (Correa, 2008) was similar to SB 392, but lacked the
insurance and/or escrow deposit requirements for the LLC and its
members. The bill died in this Committee.
SB 1225 (Harmen, Ch. 114, Stats. 2008), See Background and
Comment 3.
SB 414 (Corbett, Ch. 80, Stats. 2007) increased the liability
coverage amounts for accountancy and law LLPs.
AB 2914 (Leno, Ch. 426, Stats. 2006) extended the sunset date of
architecture LLPs until January 1, 2012.
AB 180 (Jerome Horton, 2005) was substantially similar to SB
1008 (Padilla, Ch. 634, Stats. 2010) in its provisions of the
organization of engineers and land surveyors as LLPs, and
contained a sunset date. That bill passed this Committee 6-0
and was re-referred to the Committee on Appropriations, but was
ultimately gutted and amended to deal with a different topic.
AB 1265 (Benoit, 2003) would have permitted professional
engineers and land surveyors to organize as an LLP and would
have required that, depending on the number of partners, the LLP
have between $500,000 and $5 million in insurance. This bill
was held in this Committee.
AB 1596 (Shelley, Ch. 595, Stats. 2001) extended the sunset date
SB 1077 (Price)
Page 13 of ?
of statutes permitting architects to organize as LLPs, to
January 1, 2007.
AB 469 (Cardoza, Ch. 504, Stats. 1998), authorized architects to
form a LLP provided the partnership had between $500,000 and $5
million in insurance depending on the number of partners in the
LLP. This bill also provided that its provisions would sunset
on January 1, 2002. Only partnerships with a net worth of $10
million or more were allowed to become LLPs.
AB 2401 (Miller, 1996) would have allowed contractors to operate
as LLCs. The bill died in this committee.
SB 141 (Beverly, Ch. 57, Stats. 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 SB 141 and that 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 SB 141 prior to its enactment.
SB 513 (Calderon, Ch. 679, Stats. 1995) authorized the
establishment of LLPs for licensed attorneys and licensed
accountants, as long as the LLP purchased a liability insurance
policy or maintained bank deposits of 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.
SB 469 (Beverly, Killea, Ch. 1200, Stats. 1994), See Background.
Prior Vote : Senate Committee on Business, Professions and
Economic Development (Ayes 9, Noes 0)
**************