LLC or Corporation? Licensed Contractors Beware

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Many California licensed contractors are understandably interested in limiting their liability exposure by adopting a formal legal entity. The question arises whether a corporation or limited liability company best serves their needs.

Prior to 2012, licensed contractors were limited to incorporation due to restrictions in the 1994 Limited Liability Company Act. That is, contractors were permitted to seek issuance of a contractor’s license in the name of a corporation, or obtain transfer of an existing individual license, to a corporation but not to a limited liability company.

Starting in 2012, following a change in the LLC Act, the Contractors State License Board began accepting applications for LLC contractor’s licenses. So the question arises whether there are significant differences between a contractor’s license issued to a corporation vs. an LLC.  The answer is most definitely “Yes”.

  • LLC applicants or licensees are required to file a $100,000 surety bond with the Board to cover unpaid wages or other benefits owed to a contractor’s employees. Such a surety bond is not required of corporate licensees/applicants.
  • LLC licensees must maintain “errors and omissions” (also called E&O) insurance. For LLC’S with 5 or less owners, this minimum amount of insurance is $1 million. For each additional owner, the LLC must maintain an additional $100,000 of E&O insurance coverage. Again, this insurance is not required for corporate licensees.
  • If an LLC’s license is suspended because it fails to maintain its “good standing” with the Secretary of State’s office, the individual LLC owners may face personal liability of up to $1 million each for loss or injury during any period of suspension. Not so with corporations.

In light of these additional financial burdens and exposure, it will rarely make sense for licensed contractors to select the LLC form.

It must be understood that there are also restrictions and issues involved in contractor’s licenses issued or transferred to corporations, which must be reviewed and understood.

If you are a licensed general or specialty contractor currently doing business as a sole proprietor, please contact me to discuss whether incorporating would be beneficial to your company.

 

RULLCA – New California LLC Law Coming in 2014

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On January 1, 2014, the California Revised Uniform Limited Liability Company Act (“RULLCA”) goes into effect, and will automatically apply to all California LLCs.  RULLCA will replace the Beverly-Killea Limited Liability Company Act, the current California LLC law.    

Generally, it will be unnecessary to reference Beverly-Killea when once this year ends.  Beverly-Killea will, however, remain relevant when considering acts or transactions by an LLC or its members or managers before January 1, 2014.  In addition, contracts dated prior to January 1, 2014 will also be governed under Beverly-Killea.  

Although RULLCA will not require existing LLCs to file any new documents with the Secretary of State or necessarily amend their operating agreements, it may be prudent to seek the advice of an attorney.  Particularly, older operating agreements that specifically reference Beverly-Killea should be amended to instead cite RULLCA.

While RULLCA is not a significant departure from Beverly-Killea, it has some notable differences.  For example, if there is a conflict between a provision in the operating agreement and a provision in the articles of organization, under RULLCA the operating agreement will prevail, except for third parties who reasonably rely on the articles of organization.  Under Beverly-Killea, conflicts were resolved in favor of the LLC’s articles of organization. 

Another change under RULLCA is that an LLC member will be bound to the operating agreement even if that member does not sign it.  

These are simply a few examples of what to expect.  For the most part, RULLCA represents an improvement to the default rules and was intended to align California closer to the LLC laws of other states.  It is expected the Act will be “tweaked” further before its January 1, 2014 effective date.  Significant changes will be noted in future blog posts.  

If you have an existing LLC and operating agreement, I would be pleased to review these matters with you to determine what changes, if any, are appropriate to ensure that your company will be compliant with the new Act.