8/23/11

Megan G. Mayer

On or before January, 1, 2012, the Contractors’ State License Board must process license applications from limited liability companies. The majority of states already permit LLCs to hold contractors licenses. California contractors have long hoped to gain the flexibility in financial and management structure LLCs provide, in addition to the potential for pass-through tax treatment. To these contractors, the news of Senate Bill No. 390’s passage is welcome, particularly since contractors can transfer a license held by an existing entity to a newly formed LLC. However, there are limitations that accompany this seemingly positive development.

These limitations result from concerns regarding limited liability and the relatively undeveloped body of law surrounding LLCs in California. To accommodate these concerns, California requires LLCs that obtain a contractors license to assume two additional costs that are not required of other licensed entities. First, LLCs must file and maintain a surety bond in the amount of $100,000 to protect employees from unpaid wages. Unless the qualifying individual for the LLC has at least a 10% membership interest in the LLC, then this surety bond is in addition to the $12,500 contractor’s bond required of all licensees.

Second, LLCs with five or fewer employees must carry a minimum of $1 million in errors and omissions insurance or a minimum of $500,000 in liquid assets. If the Contractor LLC has more than 5 employees, then an additional $100,000 of insurance is required per employee, up to a maximum of $5 million.

Thus, a contractor considering becoming licensed as an LLC must weigh the benefits LLCs provide for financial and managerial flexibility, potential tax pass-through treatment, and limited liability, against the costs and burdens of the surety bond and E&O insurance requirements.

Senate Bill No. 390 took effect January, 1, 2011, and requires that the Contractors’ State License Board begin processing applications by January 1, 2012. The license board anticipates accepting applications late in 2011.

Samuels, Green & Steel, LLP can help you evaluate the costs and benefits obtaining your contractors license in the name of an LLC.

To see the Contractors State License Board’s latest news on licensure for LLCs, visit http://www.cslb.ca.gov/GeneralInformation/About/LLC.asp

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