BILL ANALYSIS �
AB 1608
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Date of Hearing: April 29, 2014
ASSEMBLY COMMITTEE ON JUDICIARY
Bob Wieckowski, Chair
AB 1608 (Olsen) - As Amended: March 18, 2014
SUBJECT : PRIVATE INVESTIGATORS: LIMITED LIABILITY COMPANIES
KEY ISSUE : SHOULD LICENSED PRIVATE INVESTIGATORS BE ABLE TO
ORGANIZE AS LIMITED LIABILITY COMPANIES?
SYNOPSIS
This bill, sponsored by the California Association of Licensed
Investigators (CALI), would authorize licensed private
investigators to organize as a limited liability company (LLC).
An LLC is a business form that combines the limited liability
benefits of a corporation with the tax benefits of a
proprietorship or partnership. However, existing law generally
prohibits businesses that render "professional services" from
forming an LLC. Although the Legislature was primarily
concerned with lawyers, accountants, and medical providers when
it created the restriction, the law defines "professional
services" as any services requiring a license or certification
under the Business & Professions Code. In the years since that
rule was enacted, various business groups have asserted that
this definition of "professional services" sweeps more broadly
than necessary given the intent of the exclusion. Partly in
recognition of this concern, in recent years the Legislature has
created exemptions that allow certain businesses to organize as
LLCs, even though they require licenses or certification.
This bill would continue this legislative trend by permitting
private investigators, licensed by the Bureau of Security and
Investigative Services (BSIS), to organize as an LLC. Given
that one of the primary reasons for forming an LLC is to reap
the benefits of limited liability, it is essential to ensure
that limited liability does not prevent persons harmed by the
negligence of LLC members from recovering adequate damages. As
such, previous bills that have either authorized professional
service providers to form LLCs or LLPs have required those
businesses to maintain an adequate level of liability insurance.
In accord with this policy, this bill imposes a liability
insurance requirement of not less than one million dollars for
LLC's with five or less members, with an additional $100,000 of
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insurance for each additional member-an amount comparable to
levels required of other professionals allowed to organize as an
LLP or LLC. There is no known opposition to this bill, which
previously passed by a 14-0 vote in the Assembly Business and
Professions Committee.
SUMMARY : Authorizes, until January 1, 2020, a licensed private
investigator to be organized as a limited liability company
(LLC). Specifically, this bill :
1)Authorizes, until January 1, 2020, a private investigator to
be licensed as an LLC.
2)Requires, as a condition of the issuance, reinstatement,
reactivation, or continued valid use of a license under this
chapter, an LLC to maintain a policy or policies of insurance
against liability imposed on or against it by law for damages
arising out of claims based upon acts, errors, or omissions
arising out of the private investigator services it provides.
3)Requires an applicant for an LLC license to obtain and
maintain an insurance liability policy as specified:
a) For a LLC licensee with five or fewer persons named as
managing members, a total aggregate limit of liability of
not less than one million dollars ($1,000,000).
b) For a LLC licensee with more than five persons named as
managing, an additional one hundred thousand dollars
($100,000) of insurance shall be obtained for each person
named as managing members of the licensee except that the
maximum amount of insurance is not required to exceed five
million dollars ($5,000,000) in any one designated period.
4)Provides that the license of a LLC is subject to suspension if
a licensee fails to maintain sufficient insurance as required
by this act, and that if the license is suspended, then each
member of the LLC shall be personally liable up to one million
dollars ($1,000,000) each for damages resulting to third
parties in connection with the company's performance, during
the period of suspension, of any act or contract when a
license is required.
5)Requires an applicant for an LLC license to submit specified
information and documentation to the Bureau of Security and
Investigative Services (BSIS) that demonstrate compliance with
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financial security requirements, and also to submit a
Certificate of Liability Insurance to BSIS, signed by an
authorized agent or employee or the insurer.
6)Requires the insurer to report to BSIS the following
information for any required liability insurance policy:
name, license number, policy number, dates that coverage is
scheduled to commence and lapse, the date and amount of any
payment of claims, and cancellation date if applicable.
7)Requires the application for an LLC license to state the true
name and complete residence address of each managing member
and any other officer or member who will be active in the
business, and the designated person to be actively in charge
of the business.
EXISTING LAW :
1)Permits a company to organize as an LCC under the
Beverley-Killea Limited Liability Company Act, but prohibits a
limited liability company from rendering professional
services, as defined, unless expressly authorized to do so by
a provision of the Business and Professions Code.
(Corporations Code Section 17375.)
2)Defines "professional service," for purposes of the above, to
mean any services that may only be lawfully rendered pursuant
to a license, certification, or registration authorized by the
Business and Professions Code, the Chiropractic Act, or the
Osteopathic Act. (Corporations Code Section 13401(a).)
3)Provides that a LLC may engage in any lawful activity except
banking, insurance, or trust company operations or the
offering of professional services, and authorizes an LLC to
render services that may be lawfully rendered only pursuant to
a license, certificate, or registration authorized by the BPC
if the applicable provisions of the BPC authorize a limited
liability company to hold that license, certificate, or
registration. (Civil Code Section 17701.04(b).)
4)Provides for the licensure and regulation of private
investigators by the BSIS within the Department of Consumer
Affairs (DCA) under the Private Investigator Act (Act), and
makes a violation of its provisions a crime. (Business and
Professions Code Section 7512 et seq.)
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5)Authorizes a licensee to provide services to protect a person,
but not property, who is incidental to an investigation for
which the licensee has been previously hired to perform, and
requires, if the license provides those services, that he or
she comply with specified requirements, including maintaining
an insurance policy of at least five hundred thousand dollars
($500,000) for any one loss due to bodily injury or death, and
any one loss due to injury or destruction of property.
(Business and Professions Code Sections 7521.5, 7583.39 to
7583.41.)
FISCAL EFFECT : As currently in print this bill is keyed fiscal.
COMMENTS : This bill, sponsored by the California Association of
Licensed Investigators (CALI), would allow licensed private
investigators to organize as limited liability companies (LLCs).
Private Investigators in Calfornia. According to CALI, there
are approximately 9,000 private investigators licensed by the
Bureau of Security and Investigative Services (BSIS) within the
Department of Consumer Affairs. License requirements include
6,000 hours of compensated experience in investigative work over
3 years, or a law degree or completion of a 4-year course in
police science plus 2 years [i.e. 4,000 hours] of experience or
an associate degree in police science, criminal law, or justice
and 2 years [i.e. 5,000 hours] of experience. Licensure
requirements also include passage of background checks by DOJ
and the FBI and payment of licensure fees which are currently
$125 paid biennially. CALI notes there are many types of
investigations carried out by private investigators, such as
identifying witnesses, locating missing children and adults,
confirming the occurrence of workers' compensation fraud, and
performing background checks regarding job applicants. They
report that while the majority of licensed private investigator
businesses are organized as sole proprietorships, others are
organized as corporations or partnerships.
LLCs: A quick background. A limited liability company (LLC) is
a business form that combines the limited liability benefits of
a corporation with the "pass through" tax benefits of a
proprietorship or business partnership. (That is, the members
of an LLC are generally only liable to third parties up to the
amount of their investment in the LCC, and, unlike a
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corporation, the LLC is not subject to the so-called "double
tax.") California first recognized the LLC form with the
enactment of the Beverley-Killea Limited Liability Company Act
in 1994. Prior to that, business entities could form as
so-called "S Corporations" to obtain limited liability while
avoiding all of the tax consequences of forming a corporation.
Since 1994, the LLC has apparently become the preferred option
for businesses with multiple owners who seek, for whatever
reason, an alternative to the corporate form or the business
partnership. As discussed below, the Beverley-Killea Act
originally (and still does) provide that its provisions shall
not be construed to permit a company that renders "professional
services" to organize as an LLC, unless a specific provision of
the Business & Professions Code (BPC) expressly authorizes it to
do so. However, the Legislature has subsequently amended the
BPC to grant that express authorization to certain contractors,
private cemetery operators, alarm companies, and repossessors.
This bill would add private investigators to the list of
licensed professional service companies that may form an LLC.
Prohibition Against "Professional Services:" A provision of the
Beverley-Killea Act added in 1999 (SB 284, Chapter 1000, Stats.
of 1999) prevents any business that provides "professional
services" from forming an LLC, unless an express provision of
the Business & Professions Code authorizes it to do so. For
purposes of the Act, "professional services" has the same
meaning that it has in the Corporations Code: that is, any
business that requires possession of a license, certification,
or registration pursuant to the Business & Professions Code or
other specific statutory provision. The legislative history of
SB 284 says nothing about the rationale for excluding
"professional services," because it simply codified un-codified
language from the original 1994 legislation creating the
Beverley-Killea Act, SB 469. According to the Senate Judiciary
Committee Analysis of SB 469, however, the Act when originally
introduced contained a provision that would have allowed certain
professional practitioners, such as doctors, dentists, lawyers,
and accountants, to organize as a Professional Limited Liability
Companies (PLLC). However, this provision was opposed by the
California Trial Lawyers Association on the grounds that it
would have permitted those professionals to avoid liability for
their members' malpractice. As such, this provision was
eventually removed from the legislation and un-codified language
stated that nothing in Beverley-Killea would be construed to
permit companies providing "professional services" to form an
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LLC. As noted above, this language was unceremoniously, and
without comment, codified as Corporations Code Section 17375 in
SB 284 (Chapter 1000, Stats. of 1999.)
Subsequent Exceptions to the "Professional Service" Prohibition :
Although the rationale for excluding "professional services"
apparently focused on lawyers, accountants, and medical
providers, as finally codified the prohibition applied to any
business that rendered "professional servicers," which was in
turn defined as any business that required a license,
certification, or registration pursuant to the B&P Code, unless
a specific provision of the B&P Code provided otherwise. As
noted above, the Legislature has subsequently provided express
authorization to alarm companies (SB 1077, Chapter 291, Stats.
of 2012); contractors licensed by the Contractors State License
Board (SB 392, Chapter 698, Stats. of 2010); private cemetery
operators (SB 1225, Chapter 114, Stats. of 2008); and
repossession agencies (AB 1541, Chapter 505, Stats. of 1995.)
In addition to allowing these businesses to organize as LLCs,
the Legislature has also created an alternative to the LLC by
allowing certain professional service providers, namely lawyers,
accountants, engineers, surveyors, and architects, to form a
"limited liability partnership" or LLP. (Corporations Code
Sections 16954 et seq.) The LLP has essentially the same tax
advantages as an LLC and limits a partners' exposure for the
malpractice of other partners, so long as they are not involved
in the negligent conduct or do not supervise someone who
committed the negligent act. In short, the prohibition against
"professional service" companies forming LLCs has been
effectively breached by either providing express LLC
authorization to a handful of professional services in the B&P
Code, or by permitting other professional service providers to
obtain similar protections by forming an LLP. This bill follows
this trend by providing express authorization for private
investigators to form LLCs.
Limited Liability, Insurance Requirements, and Sunset Provision :
Given that one of the primary reasons for forming an LLC is to
reap the benefits limited liability (the other, to reap the tax
benefits, is of less concern to this Committee), it is essential
to ensure that limited liability does not prevent persons harmed
by the negligence of LLC members from recovering adequate
damages. As such, previous bills that have either authorized
professional service providers to form LLCs or LLPs have
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required those businesses to maintain an adequate level of
liability insurance. In accord with this policy, this bill
imposes a liability insurance requirement comparable to levels
required of professionals who organize as an LLP or LLC. In
addition, as was the case with prior legislation that permitted
specific professional service businesses to form LLCs, this bill
also includes a sunset date of January 1, 2020. As with all
sunsets, this will allow the Legislature to revisit the issue
and respond to any unintended consequences and evaluate the
adequacy of required liability insurance levels.
Limited Liability Companies Are Believed To Offer Larger
Businesses Significantly More Desirable Tax And Nontax Benefits
Compared To Other Forms, With Unknown Revenue Implications For
The State. Generally, a LLC is a legal entity formed under the
Beverly-Killea Limited Liability Company Act, which allows one
or more owners to conduct a business without any owner having
personal liability for the obligations of the business. The
owners of an LLC may be individuals, or they may be corporations
or other business entities. That is, a group of corporations,
partnerships or individuals may combine to form and conduct an
LLC. It is expected that many existing corporations may
re-organize as LLCs to take advantage of lower taxes, and that
partnerships may do so to limit their liability.
The salient non-tax characteristics of a 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). Unlike a corporation, an LLC can have different
classes of ownership and may allocate income, gains, losses, and
other items disproportionately among owners without affecting
the LLC's pass-through tax treatment.
There are also important tax consequences. In regular
corporations, both the entity and the shareholders are taxed on
profits, and on the increased value of the property when the
property is sold or the corporation is liquidated. LLCs avoid
taxation of the entity. In addition, because the LLC usually
elects to be treated as a partnership for income tax purposes,
the income, gains, losses, deductions, and credits of the LLC
generally will flow through to its members for reporting on
their individual tax returns, with the distribution of that
income depending on the terms of the LLC agreement, not
necessarily the ownership interest of the individual members.
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There appears to be no necessary relationship between allocation
of management rights and profits among the owners of an LLC. A
large owner may have little or no control over the company,
while profits could be apportioned to LLC members who have the
least tax exposure.
Combined with the ability of LLCs to allocate income, gains,
losses, and other items disproportionately among owners, LLCs
may be arranged in such a way as to create significantly more
desirable tax treatment than corporations or other forms of
business organization.
Naturally, more favorable tax consequences for the owners may
translate into less tax revenue for the state. The Revenue and
Taxation Committee advises that, to deal with these revenue
consequences, existing law requires California LLCs to file tax
returns and pay a relatively modest $800 annual LLC tax, similar
to the minimum tax paid by "S" corporations. In addition to the
LLC tax, California LLCs must also pay an LLC fee between $900
and $11,790 based on its total income from all sources derived
or attributable to this state. These fees appear to be not as
progressive as the corporate or personal tax rates. According
to the sponsor, there are currently over 9,000 licensed PIs in
California, although it is not known what proportion of them are
corporations that would restructure as LLCs under this bill.
Because the bill has not been referred to the Revenue and
Taxation Committee it is unknown whether the LLC fees these
entities would pay in lieu of taxes would be a net loss or gain
for state revenues. However, the bill will be referred to the
Appropriations Committee which may be able to assess these
issues.
REGISTERED SUPPORT / OPPOSITION :
Support
California Association of Licensed Investigators (CALI)
Opposition
None on file
Analysis Prepared by : Anthony Lew / JUD. / (916) 319-2334
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