CALIFORNIA CONTRACTORS CAN NOW FORM AND OPERATE THROUGH LIMITED LIABILITY COMPANIES.

Written by Darius Khayat // August 24, 2012 // Articles

The California Business and Professions Code only authorizes a limited liability company to render services that can lawfully be rendered  pursuant to a license, certificate, or registration authorized by the Business and Professions Code if the provisions of that code authorizes a limited liability company to hold that license, certificate, or registration. Until recently, this excluded businesses providing contracting services as the law relevant to obtaining a California State Contractor’s License did not specifically authorize the issuance of a license to a limited liability company.

The passage of Senate Bill 392 (Statutes of 2010, Chapter 698) authorizes the California State Contractors License Board (“CSLB”) to issue contractor licenses to limited liability companies (LLC’s).  The CSLB was required to begin accepting applications for the issuance of a license to LLC’s in January of 2012.

Although there are some differences in the requirements to obtain a license for an LLC versus a corporation, like increased bond requirements for one, it is a viable and attractive alternative to operating through a corporation for applicants that prefer a partnership type structure for their business.  At this time, the primary benefits I see are tax planning related.  From a liability protection standpoint, the possibility of personal liability in the event of a suspension, as mentioned below, may be a non-starter for some clients, particularly those who tend not to prioritize annual business filing and licensing responsibilities.  There are many other nuances between the entity types that may guide a client in determining which structure is most appropriate for their needs.

Below are some primary requirements for, and components of, LLC licenses as excerpted from the California State Contractor’s License Board website:

$100,000 Surety Bond

A $100,000 surety bond (in addition to the $12,500 contractor bond) is required for the issuance, reissuance, reinstatement, reactivation, and renewal of an LLC license for the benefit of any employee or worker damaged by the LLC’s failure to pay wages, interest on wages, or fringe benefits, as well as other contributions (not required for inactive LLC licenses). (Business and Professions Code section [B&P] 7071.6.5)

$1 Million Liability Insurance Minimum

Liability insurance with the cumulative limit of $1 million for licensees with five or fewer persons listed as members of the personnel of record is required. Also, an additional $100,000 is required for each additional member of the personnel of record, not to exceed $5 million total. (B&P Code section 7071.19)

B&P Code section 7071.19 (c) requires that LLC liability insurance policies be written by insurers that are “duly licensed by this state.” According to the legal office of the California Department of Insurance (CDI), the only insurers that are duly licensed by the State of California are admitted insurers that are licensed by CDI, searchable on their website under Insurance Company Profiles. Policies written by surplus line insurers are not acceptable.

Personnel of Record

Every person who is an officer, member, responsible manager, or director must be listed as personnel of record on LLC applications. (B&P Code section 7065)

Qualifying Individual

LLC licenses must be qualified by appearance of a responsible managing employee (RME), responsible managing officer (RMO), responsible managing manager, or responsible managing member. (B&P Code section 7065)

$1 Million Personal Liability during Secretary of State Suspension

If an LLC license is suspended for failing to be registered and in good standing with the Secretary of State, each person within the LLC may be held personally liable up to $1 million each during the time the LLC is suspended. (B&P Code section 7076.2)

Liability Insurance Information on Contracts

Specific general liability insurance information is required to be included on the LLC’s home improvement and service and repair contracts. (B&P Code sections 7159 and 7159.10)

License Number Reissuance

Sole owner and corporate license numbers may be reissued to LLCs under certain circumstances. (B&P Code section 7075.1)

Joint Venture Licenses

An LLC may be listed as an entity on a joint venture license. (B&P Code section 7029)

Partnership Licenses

LLCs may serve as a general partner on a partnership license provided the LLC meets the above requirements relating to the additional surety bond and liability insurance. An LLC serving as a limited partner on a partnership license is not required to meet the additional surety bond and liability insurance requirements.

Business Name Styles

According to the Secretary of State’s office, LLC business names have specific requirements and restrictions. Interested parties should contact the Secretary of State’s office directly for full information about LLC business name issues. Briefly, LLC business names must comply with the following.

• The name of an LLC must end with the phrase “Limited Liability Company” or the abbreviation “LLC” or “L.L.C.” The words “Limited” and “Company” may be abbreviated to “Ltd.” and “Co.,” respectively. (Corporations Code section 17052 (a))

• The name of an LLC may not include the words “bank,” “trust,” “trustee,” “incorporated,” “inc.,” “corporation,” or “corp.” (Corporations Code section 17052(d))

• The name of an LLC may not include the words “insurer” or “insurance company” or any words suggesting that it is in the business of issuing policies of insurance and assuming insurance risks. (Corporations Code section 17052(d))

• If the name of a foreign (out-of-state or out-of-country) LLC does not conform to the requirements of Corporations Code section 17052, the foreign LLC must agree to transact intrastate business under an assumed name that does meet the requirements of Corporations Code section 17052 to register with the Secretary of State. (Corporations Code section 17452)

Other Requirements

Most other requirements and provisions that apply to corporate licenses also will apply to LLC licenses.

 

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