LLC or Corporation? Licensed Contractors Beware

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.