New Businesses Qualify as LLPs and LLCs in California

By January 9, 2011 Blog, Business Law

During the last legislative session, California enacted two new laws that may change the choice of entity decision for licensed contractors, surveyors and engineers. Starting September 30, 2010, SB 1008 allows engineers and land surveyors to operate their businesses as limited liability partnerships (“LLPs”).  Previously, California only allowed attorneys, accountants and, until January 1, 2012, architects to conduct business as an LLP.  This legislation is temporary.  If not extended, surveyors and engineers will lose this privilege on January 1, 2016.  This change in the law allows groups of engineers and surveyors to practice together, but shield each other from personal liability for any errors or omissions of others within the group.  The law does impose insurance requirements, however.  Any LLP offering surveying or engineering services is required to obtain insurance, or provide security, of not less than $100,000 multiplied by the number of licensed persons in the practice, with a minimum of $2,000,000.  This is greater than the $1,000,000 required of architectural firms.  The California Secretary of State’s office has already updated the registration form, which can be found here.

Starting January 1, 2011, SB 392 amends the California Business & Professions Code to allow contractors licenses to be issued to limited liability companies.  The Contractors State License Board is not required to issue those licenses until January 1, 2012, so there is still a bit of a wait for those contractors hoping for non-corporate income tax treatment for their businesses.  This is an important change for a number of reasons.  Previously, any contractor wanting protection from personal liability was forced to form a corporation, which was not always the best alternative from a tax perspective.  Now, those in the construction industry requiring a contractor’s license will have a choice.  There is one significant requirement of LLCs seeking a license that does not apply to other types of business.  SB 392 requires that any LLC holding a license file a surety bond in the amount of at least $100,000 covering damages for claims of employees.  There was concern that, with the lack of personal liability of an LLC, when compared to a general partnership or sole proprietorship, employees would not have a way to guarantee payment of wages.  In contrast, corporations, sole proprietors and partnerships are only required to hold a $10,000 bond.  The cost of this bond may make it difficult for new businesses to operate in the LLC form.

Anne E. Senti-Willis, Business Group