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Written By: Roger J. Brothers, Esq. and Connor M. Day, Esq.

Buchman Provine Brothers Smith LLP

Walnut Creek, California

On September 30, 2010, former Governor Schwarzenegger signed into law Senate Bill No. 392 ("SB 392"), which amends the California Business and Professions Code to permit a limited liability company ("LLC") to be licensed as a contractor under the Contractor's State License Law. Pursuant to SB 392, the California Contractors License Board ("CSLB") is required to begin issuing contractor's licenses to LLCs by no later than January 1, 2012. Prior to 2012, LLCs were not permitted to hold California contractor's licenses. With the enactment of SB 392, however, the License Law has been amended comprehensively in order to provide for the treatment of LLCs generally on par with corporations with respect to licensing.

In order for an LLC to hold a contractor's license, SB 392 requires an LLC to satisfy certain security (insurance), surety bond and management licensing requirements. An LLC is required to maintain a minimum level of security for consumer claims, which can be satisfied through insurance. The LLC is required to carry liability insurance with a minimum aggregate limit of $1 million, and up to $5 million, depending on the number of persons listed on the personnel record of the LLC. (See, Business & Professions Code § 7071.19.) The policies of insurance must cover damages arising out of claims relating to the provisions of contracting services by the LLC.

In addition, the LLC must file and maintain a surety bond in the amount of $100,000 for the benefit of employees to ensure payment of wages, interest and fringe benefits. (This bond is in addition to the $12,500 contractor's license bond required of all licensees.) Additionally, if the LLC is signatory to a collective bargaining agreement, the bond will be required in order to cover fringe benefit trust fund contributions. The surety bond must be executed by a manager of the LLC and made in favor of the State of California. (See, Business & Professions Code § 7071.6.5.) Finally, the LLC will qualify for a license by examination of either a responsible managing officer, responsible managing manager, responsible managing member or responsible managing employee. (See, Business & Professions Code § 7065.) SB 392 provides also for transfer of existing license numbers to an LLC under certain conditions which will enable existing licensees to take advantage of the LLC form of doing business.

In preparing and submitting its license application to the CSLB, it is imperative for the LLC to include all of the necessary (and correct) information in its application, or risk having its application rejected by the CSLB. To date, the CSLB has received approximately 36 LLC applications; however, many of these applications were rejected because they were submitted without the correct information. The CSLB has indicated that some of the most common pitfalls are failing to include the LLC registration number (which must be issued by the California Secretary of State) in the application and failing to ensure that the personnel listed on the application matches the personnel list reported by the Secretary of State. (See, Business & Professions Code § 7065.)

The CSLB cannot process LLC license applications until all of the information in the application is consistent with the Secretary of State's records. Contactors should be aware that the Secretary of State currently has a four (4)-month processing backlog for the Statement of Information initial filings and updates, which are essential for reporting the LLC's personnel (members and managers) to the Secretary of State.

With the enactment of SB 392, a contractor wanting protection from personal liability will now have a choice of doing business under one of two limited liability entities, i.e., a corporation or a LLC. If you would like to learn more about the benefits of SB 392 and the potential advantages and disadvantages of doing business as a LLC for your particular business, please contact us.  

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