Changes to Construction Law in 2012: LLCs Can Now Become Licensed Contractors

This is the second in a series on Changes to the Construction Law 2012 by Kevin Jeffery, Graniterock Legal Counsel.

Prior to this year, only individuals, partnerships, corporations and joint ventures were eligible to become licensed as contractor in California. Effective January 1, 2012, the Contractors State License Board began processing license applications from limited liability companies (LLCs), as well.

This change has been in the works since the fall of 2010, when the California legislature passed a bill instructing the CSLB to open the licensing doors to LLCs no later than January 1, 2012. Many in the industry have cheered the news that the LLC form of business is now available to contractors. These observers view the LLC as limiting a business owner’s personal liability as effectively as a corporation, but requiring compliance with fewer corporate formalities.

While the CSLB has begun accepting LLC license applications, several restrictions apply to LLC licenses that do not apply to licenses granted to individuals, partnerships, corporations or joint ventures. An LLC licensed as a contractor must post a $100,000 surety bond, which is designed for the benefit of any employee or worker damaged by the LLC’s failure to pay wages or benefits. This surety bond is in addition to the standard $12,500 contractor bond. LLCs must also maintain liability insurance with an aggregate limit of at least $1,000,000 in order to keep their license active. (LLCs with more than five members or responsible managers must carry liability insurance at an increased limit; detailed requirements are set forth in Business & Professions Code section 7071.19.)

An individual licensed contractor who wishes to transfer his or her license to a newly formed LLC may do so, as long as the individual licensee maintains a majority membership interest in the LLC, and the licensee continues to meet other CSLB requirements. A corporation licensed as a contractor that wishes to transfer its license a newly formed LLC may do so, as long as there is no change in the personnel of record, the corporate entity’s license name is cancelled subsequent to the transfer, and the licensee continues to meet other CSLB requirements.