Beginning Jan. 1, 2012, California’s contractor licensing authority must now begin issuing contractor’s licenses to limited liability companies. Previously, contractor’s licenses were only available to individuals, corporations and partnerships.
The limited liablity company is the preferred form of entity for most real estate owners, developers and investors. A limited liability company is a superior form of entity not only because of its limited liability features, but also because of its flexibility and ability to act as a pass-through entity for tax purposes if properly structured.
However, for many years, limited liability companies (or LLCs) could not hold a contractor’s license in California. As a result, real estate developers often had to form affiliate corporations or limited partnerships with corporate general partners to hold contractor’s licenses issued by California’s Contractor’s State License Board. The formation of these entities and the related flow through accounting and legal issues were an administrative burden for some developers.
This year the Contractor’s State License Board is required to begin processing applications by LLCs for a contractor’s license. The law does add some additional requirements for those seeking to license an LLC. For example, applicants must procure a $100,000 surety bond in addition to the $12,500 contractor bond. LLC’s wishing to be licensed must also secure liability insurance with a minimum limit of $1 million and an aggregate limit as high as $5 million, depending on the number of employees of record. Satisfying these additional requirements makes business sense for most sophisticated real estate developers anyway.
Now that LLCs may hold contractor licenses, real estate developers that typically purchased land or brownfields for development with the LLC form of entity may now consolidate their land ownership and construction activity into the same entity. It is important to consult with an attorney knowledgeable with your situation to determine whether this consolidation effort is best for you.