Bryant H. Byrnes, Esq.

By: Bryant Byrnes, Esq.

As covered in my previous article, beginning January 1st, 2012 the Contractors State License Board will begin processing applications for issuance of limited liability company contractor licenses. Until now contractors could be sole proprietors, partnerships, or corporations, but not limited liability companies.

Giant, Death Penalty Faux Pas. In my last article, I repeatedly referred to “an” LLC. My fourth grade teacher promptly contacted me and correctly pointed out it was properly “a” LLC. I stand corrected and red faced.

Previous Article. In Part One, I covered what a limited liability company is and some of its advantages and disadvantages in comparison with corporations. Here is brief summary to jog the memory:

Limited liability companies (LLCs) are a flexible form of business entity that blends elements of partnership and corporate structures. It is a legal form of company that provides liability protection to its owners.

Often incorrectly called a “limited liability corporation” (instead of company), a LLC is a hybrid business critter. The primary characteristic it shares with a corporation is limited liability. The primary characteristic it shares with a partnership is the availability of pass-through income taxation. It is considered more flexible than a corporation and it is well suited for companies with a single owner.

It is important to understand that “limited” liability protection does not mean that the LLC owners are always absolutely protected from personal liability. Similar to “piercing the veil” attacks on corporations, courts can and sometimes do “pierce the veil” of a LLC when some type of fraud or misrepresentation is involved.

California Senate Bill 392. Starting January 1, 2012, this bill amends the California Business & Professions Code Sections 7071.65 and 7071.19 to allow contractor’s licenses to be issued to LLCs. This law brings California in line with the majority of states that permit a contractor to be formed as a LLC.

Advantages (and differences from corporations). The advantages of a LLC – and mitigating for a change – are several.

Costs. As discussed in Part One, start up costs are a bit less expensive than for corporate formation.

Good for Certain Large Contractors. LLCs perhaps would be a good fit for contractors who are involved in real estate development joint ventures. They would also provide planning opportunities for developers who desire to create special purpose general contractors. For instance, affordable housing developers frequently desire to act also as a general contractor in the development of affordable housing due to differing guidelines many state housing agencies have with respect to fees that can be charged for development activities, as opposed to general contracting activities. Expanding contractor licensing to LLCs creates greater flexibility than a corporation for these developers in structuring such arrangements.

Disadvantages. There are also disadvantages to being a LLC – thus mitigating switching from a present corporation to a LLC.

Additional Surety Bond Requirements. Addressing concerns about leaving construction employees without recourse for non-payment of wages, additional bond requirements were enacted. For a LLC to hold a contractor’s license, in addition to the $12,500 contractors’ bond required it must file and maintain an additional surety bond in the amount of $100,000 for the benefit of employees to ensure payment of wages, interest, and fringe benefits.

Increase in Required Insurance. LLCs will also be required to maintain an errors and omission insurance policy in an amount not less than $1,000,000, and up to $5,000,000, depending on the number of persons listed on the personnel record of the LLC.

Business Taxation. Both corporations and LLCs must pay California business entity income tax. Because the LLC entity income tax is based on sales, all other things being equal a LLC would appear to be required to pay more.

So, Switch? If you are presently a corporation, should you switch to a LLC? If you are a large player, or plan to be one, and want more flexibility in structuring your entity, consider it. But run the numbers first, and for heaven sakes, also talk with your CPA.

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Bryant H. Byrnes, Esq. practices construction law in the San Francisco Bay Area and is counsel to the SFBA NARI Board of Directors. Questions? His website is www.bryantbyrnes.com. Feel free to contact Bryant by email at bhbatty@pacbell.net.