Prior to January 1, 2011, the California Corporations Code prohibited LLCs from rendering “professional services as defined in section 13401 and 13401.3” of the Corporations Code. Section 13401 defines “professional services” to include those where a license is required by the California Business & Professions Code. The Business & Professions Code requires contractors, architects, professional engineers and others in the construction industry to be licensed.
The new law comprehensively amends the Business & Professions Code to give LLCs the same status as other corporations and to allow them to obtain a contractor’s license under the same rules that apply to corporations. Section 17002 of the Corporations Code is also amended to allow companies that provide “professional services” to be LLCs as long as Business & Professions Code allows it.
Also, previously the California State License Board (CSLB) allowed issuance of contractors licenses only to “individuals, partnerships and corporations” and now they can be issued to “individuals, firms, partnerships, corporations, limited liability companies, associations, organizations, or any combination thereof.”
There are two important conditions associated with obtaining a contractors license as an LLC:
- A contractor LLC must put up a $100,000 surety bond in addition to the $12,500 bond that all contractors have to provide. The purpose of the bond is to protect employees and covers wages and fringe benefits and if LLC is signatory to a collective bargaining agreement the bond must also cover welfare fund contributions, pension fund contributions and apprentice program contributions. To apply for the bond, the LLC will need to submit all financial records of the owners and managers and its articles of incorporation and list the full name of the LLC as well as any “doing business as” names.
- A contractor LLC must provide errors & omissions insurance of at least $1 million and up to $5 million depending on number of “personnel of record” listed by the LLC with the CSLB. [$1 million if only five people listed, then additional $100,000 for each other person listed up to a maximum of $5 million.] Insurance may be either claims made or occurrence, but any LLC dissolving or winding down must provide extended reporting period coverage (tail coverage) for three years if available from the insurer. The LLC must submit a Certificate of Liability Insurance to the CSLB and the contractor’s license is suspended by operation of law if the insurance is not continually provided. [In California, that is very risky.] The Certificate of Insurance must include all relevant information, including dates and amount of any payment of claims under the policy.
The CSLB does not have to start processing applications until January 1, 2012, but is expected to start sooner and will be accepting applications in late 2011.
There are advantages of doing business as LLC, such as:
- Protections from personal liability for the LLC’s business debts
- Ability to pass through business taxes to individual members
- Tax strategies that give owners more freedom to remove equity from the company
- Flexibility for distribution of profits and losses separate from control and ownership
The new law allows the transfer of an existing license number to the LLC under certain conditions.
An individual who currently owns a license may reassign his or her license to an LLC if the individual formed the LLC and maintains more than fifty percent voting power in the LLC.