BILL ANALYSIS �
SENATE JUDICIARY COMMITTEE
Senator Hannah-Beth Jackson, Chair
2013-2014 Regular Session
AB 1608 (Olsen)
As Amended March 18, 2014
Hearing Date: June 24, 2014
Fiscal: Yes
Urgency: No
RD:rm
SUBJECT
Private investigators: limited liability companies
DESCRIPTION
This bill would, among other things, until January 1, 2020,
authorize the Bureau of Security and Investigative Services
within the Department of Consumer Affairs to issue a private
investigator's license to limited liability companies (LLCs) if,
among other things, certain insurance requirements are met.
BACKGROUND
Under the Beverly-Killea Limited Liability Company Act (the LLC
Act) (SB 469 (Beverly and 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.
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
(more)
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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 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 Sec. 17703.04.) (In the corporation
context, however, a shareholder retains limited liability
similar to that of an LLC member, but a shareholder cannot
participate in the day-to-day management of the company in the
way that an LLC member can.)
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).
Since the Beverly-Killea LLC Act was enacted, only contractors,
private cemeteries, repossessors, and alarm companies have been
authorized 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
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(Florez, Ch. 698, Stats. 2009) authorized LLCs to be issued
contractors' licenses and imposed minimum levels of liability
coverage. The requirement of a minimum amount of liability
coverage was also included in bills that authorized attorneys,
accountants, architects, engineers, and land surveyors to
operate as the only LLPs in California. Notably, a bill that
was 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).) Most recently, SB 1077 (Price, Ch. 291, Stats. 2012),
among other things, allowed for an LLC to be issued an alarm
company operator's license, as is permitted in 49 other states.
This Committee conditioned its approval of SB 1077 on similar
liability coverage that was included in other LLC and LLP bills,
and added a three year sunset to its provisions.
This bill now seeks to authorize licensed private investigators
to form as LLCs, contingent upon specified liability insurance
requirements. This bill was heard in the the Senate Business,
Professions and Economic Development Committee on June 16, 2014
and was passed out on a 9-0 vote.
CHANGES TO EXISTING LAW
Existing law , the Beverly-Killea LLC Act, generally prohibits
domestic and foreign limited liability companies from rendering
professional services, as defined, in California. Existing law
provides that 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. 17701.04.)
Existing law defines professional service 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 the debts, obligations, or other
liabilities of a limited liability company, whether arising in
contract, tort, or otherwise, are solely the debts, obligations,
or other liabilities of the limited liability companies to which
the debts, obligations, or other liabilities relate. They do
not become the debts, obligations, or other liabilities of a
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member or manager solely by reason of the member acting as a
member or manager for the limited liability company. (Corp.
Code Sec. 17703.04(a).) Existing law provides for the liability
of a member of an LLC under the common law theory of alter ego
liability, and under any judgment of a court for any debt,
obligation, tort or liability of the LLC, to the same extent as
a shareholder may be personally liable for any debt, obligation,
or liability of the corporation, except as specified. (Corp.
Code Sec. 17703.04(b).) 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. 17703.04(e).)
Existing law , the Private Investigator Act, provides for the
licensure and regulation of private investigators by the Bureau
of Security and Investigative Services within the Department of
Consumer Affairs and makes a violation of the licensing
requirements a crime. Existing law defines a person, for
purposes of the act, to include any individual, firm, company,
association, organization, partnership, and corporation. No
person, unless specifically exempted under this act, shall
engage in the business of private investigator unless that
person has applied for and received a license to engage in that
business pursuant to this chapter. (Bus. & Prof. Code Sec. 7512
et seq.)
Existing law provides that, generally, a private investigator is
a person, other than an insurance adjuster, who, for any
consideration whatsoever engages in business or accepts
employment to furnish or agrees to furnish any person to protect
persons, as specified, or engages in business or accepts
employment to furnish, or agrees to make, or makes, any
investigation for the purpose of obtaining, information with
reference to:
crime or wrongs done or threatened against the United States
or any state or territory of the U.S.;
the identity, habits, conduct, business, occupation, honesty,
integrity, credibility, knowledge, trustworthiness,
efficiency, loyalty, activity, movement, whereabouts,
affiliations, associations, transactions, acts, reputation, or
character of any person;
the location, disposition, or recovery of lost or stolen
property;
the cause or responsibility for fires, libels, losses,
accidents, or damage or injury to persons or to property; or
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securing evidence to be used before any court, board, officer,
or investigating committee. (Bus. & Prof. Code Sec. 7521.)
Existing law authorizes a private investigator to provide
services to protect a person, but not property, incidental to an
investigation which the investigator has previously been hired
to perform, and requires, if the investigator provides those
services, that he or she comply with specified requirements,
including maintaining an insurance policy of at least $500,000
for any one loss due to bodily injury or death, and any one loss
due to injury or destruction of property. (Bus. & Prof. Code
Secs. 7521.5, 7583.39, 7583.40, 7583.41)
Existing law requires that, before an application for a license
is granted, the applicant for a license or his or her manager
meet all of the following: (1) be at least 18 years of age; (2)
not have committed acts or crimes constituting grounds for
denial of a license; (3) comply with the requirements specified
in this chapter for the particular license for which an
application is made; and (4) comply with other qualifications as
the director may fix by rule. (Bus. & Prof. Code Sec. 7526.)
Existing law establishes specific requirements for an
application for a private investigator license, including:
The application must be verified and include, among other
things, the full name and business address of the applicant,
the name under which the applicant intends to do business, a
statement as to the general nature of the business in which
the applicant intends to engage, and a verified statement of
his or her experience qualifications. (Bus. & Prof. Code Sec.
7525.1.)
An individual, qualified manager, partner or corporate officer
must submit a photograph taken within one year immediately
preceding the date of filing of the application, together with
fingerprint images, with the application for the purpose of
conducting criminal background checks. The identification form
shall include residence addresses and employment history for
the previous five years and be signed under penalty of
perjury. (Bus. & Prof. Code Sec. 7525.1(e).)
If the applicant is a corporation, the application must state
the true names, and complete residence addresses of the chief
executive officer, secretary, chief financial officer, and any
other corporate officer who will be active in the business,
and the designated person to be actively in charge of the
business, and requires the application to be signed under
penalty of perjury. (Bus. & Prof. Code Sec. 7525.1(h).)
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This bill would authorize an LLC to hold a private investigator
license under the Business and Professions Code.
This bill would provide that as a condition of the issuance,
reinstatement, reactivation, or continued valid use of a license
under this chapter, a limited liability company shall, in
accordance with this section, 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.
This bill would provide that the total aggregate limit of
liability under the policy or policies of insurance required
under this section shall be as follows:
for a limited liability company licensee with five or fewer
persons named as managing members, the aggregate limit shall
not be less than $1,000,000; and
for a limited liability company licensee with more than five
persons named as managing members, an additional $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 $5,000,000 in any one
designated period, less amounts paid in defending, settling,
or discharging claims.
This bill would provide that prior to the issuance,
reinstatement, or reactivation of a limited liability company
license, the applicant or licensee shall, in the manner
prescribed by the bureau, submit the required information and
documentation required by this bill, and requested by the bureau
that demonstrates compliance with the above financial security
requirements.
This bill would provide that for any insurance policy secured by
a licensee in satisfaction of this section, a Certificate of
Liability Insurance, signed by an authorized agent or employee
of the insurer, shall be submitted electronically or otherwise
to the bureau. The insurer issuing the certificate shall report
to the bureau the following information for any policy required
under this section: 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.
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This bill would provide that if a licensee fails to maintain
sufficient insurance as required by this section, the license is
subject to suspension. If the license of a limited liability
company is suspended, each member of the limited liability
company shall be personally liable up to $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 for which a license is required.
This bill would make conforming changes to the Private
Investigators Act to include terminology specific to LLCs.
This bill would sunset on January 1, 2020.
COMMENT
1. Stated need for the bill
According to the author:
Licensed private investigators would like to organize their
business entities as Limited Liability Companies (LLCs) but
the Private Investigator Act (Business and Professions Code
Section 7512 et seq.) does not provide authorization.
This legislation would enable licensed private investigator
businesses to be organized as [LLCs].
2. Longstanding concerns with limited liability
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, Ch. 1200, Stats.
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
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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 is generally
not able to recover against the individual's personal assets. To
address that issue, previous legislation authorizing various
professions to organize as LLCs also generally included
insurance requirements to ensure some recovery by the injured
party should the LLC business have little or no assets because
profits are regularly distributed to its members.
Accordingly, this bill would similarly allow licensed private
investors to form as an LLC and require those LLCs to maintain a
minimum level of insurance in an amount similar to other types
of LLCs. Specifically, an LLC licensee with five or fewer
persons named as managing members must have an aggregate limit
of insurance not less than $1,000,000. A limited liability
company licensee with more than five persons named as managing
members, would be required to obtain an additional $100,000 of
insurance for each person named as managing members of the
licensee, except that the maximum amount of insurance is not
required to exceed $5,000,000 in any one designated period, less
amounts paid in defending, settling, or discharging claims.
It should be noted that the amount of insurance required of an
LLC or LLP is a critical policy issue, as is the ability to
periodically re-evaluate the required amount to ensure that it
is sufficient to cover anticipated claims. For example, when
the authorization for architects to organize as LLPs approached
its sunset date, this Committee required the proponents to bring
forth evidence that would demonstrate the adequacy of their
insurance levels and the appropriateness of the removal of the
sunset date. Ultimately, after analyzing the information
brought forth, it was determined in this Committee that the
information provided supported an extension, but not a deletion
of the sunset, and supported maintaining the current insurance
levels. (See AB 560 (Gorrell, Ch. 291, Stats 2011.) With
respect to this bill, it is essential that the Committee have a
similar opportunity to review the proposed level of insurance in
the near future so as to ensure that injured parties are able to
obtain adequately recovery for their injures. (See Comment 4.)
3. Liability of LLC members in the event of suspension
One concern with LLC bills is with regard as to what happens to
an injured consumer in the event that the LLC does not maintain
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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 license. (See e.g. SB 392 (Florez,
Ch. 698, Stats. 2009).) For example, with respect to LLCs
issued a contractor's license that is subsequently suspended,
each member is held personally liable for up to $1 million in
damages for injuries resulting from acts and omissions of the
LLC.
Consistent with previous LLC legislation, this bill includes
language that holds each member personally liable for up to $1
million in damages when the LLC's license is suspended for the
failure to maintain sufficient insurance. That provision seeks
to ensure that injured consumers can still recover damages for
actions taken by the LLC at a time when the license is
suspended.
4. Sunset provision should be shortened
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
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.
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The recognized need for sunsets is reflected in the history of
numerous LLP related bills. While this bill contains a sunset,
it is substantially longer than prior sunset's required for new
LLCs. Accordingly, the following amendment would mirror the
three year sunset provided to alarm companies in SB 1077 last
year.
Suggested Amendment :
Shorten the January 1, 2020 sunset to a January 1, 2018
sunset.
Support : None Known
Opposition : None Known
HISTORY
Source : California Association of Licensed Investigators
Related Pending Legislation : None Known
Prior Legislation :
SB 1077 (Price, Ch. 291, Stats. 2012), among other things,
allowed for an LLC to be issued an alarm company operator's
license if the LLC met the liability coverage required by the
bill.
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) was enacted to authorize
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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).
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 (Harmon, 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.
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
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
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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 and Killea, Ch. 1200, Stats. 1994) See
Background.
Prior Vote :
Senate Business, Professions & Economic Development Committee
(Ayes 8, Noes 0 )
Assembly Floor (Ayes 78, Noes 0)
Assembly Appropriations Committee (Ayes 17, Noes 0)
Assembly Judiciary Committee (Ayes 10, Noes 0)
Assembly Business, Professions & Consumer Protection Committee
(Ayes 14, Noes 0)
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