VB CLIENT ADVISORY - Contractor Law
SHOULD CONTRACTORS MAINTAIN A LICENSE IN AN LLC: IMPORTANT CONSIDERATIONS FOR CONTRACTORS WHO ARE CONSIDERING OBTAINING A LICENSE THROUGH AN LLC
As of January 1, 2012, the Contractors State Licensing Board (“CSLB”) began issuing licenses to qualifying limited liability companies (“LLCs”)In general, the CSLB will treat LLCs like corporations that hold contractors licenses. However, contractors should be aware of some notable exceptions, including the following unique requirements for LLCs:
- A $100,000 surety bond for the benefit or employees or workers damaged by the failure to pay wages or benefits (in addition to the $12,500 contractor’s bond required for all licensees)
- General liability insurance of at least $1,000,000 and up to $5,000,000 depending on the number of employees;
- Every officer, member, responsible manager, or director of the LLC must be listed as personnel of record on the license application.
- A responsible managing officer, responsible managing manager, responsible managing member, or responsible managing employee may qualify for a license on behalf of the company.
LLCs are eligible for partnership and joint venture licenses (provided they meet the requirements). In addition, an existing licensee may transfer its license to an LLC.
Before deciding how to structure his/her business, contractors should at least become familiar with the differences between a California LLC and an S corporation (other structures also may be considered). For instance, the State of California taxes an S corporation on the basis of its revenues, whereas it taxes an LLC on the basis of its gross revenues according to a defined schedule of fees. This difference can be significant for a business with high costs and low margins. Furthermore, operating as an LLC may also unnecessarily result in self-employment tax liability that a business could avoid by incorporating as an S corporation.
Beyond these financial considerations, contractors should also consider the differences involved in the operations of the two types of entities. Although both entities provide similar liability protection for their owners, an S corporation must follow much more restrictive rules and formalities than those involved with an LLC. In fact, the flexibility of LLCs in management, meetings and distribution requirements flexibility often makes it more attractive for business owners than an S corporation.
This provides just a summary of some considerations that go into making an informed decision regarding which entity to use for a contracting business.If you have questions or would like more information, please contact our office.