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California's Inconsistent Approach to LLCs

Updated: Apr 10

For whatever reason (and perhaps there are several), the California legislature has a bizarre relationship with LLCs. California law allows for the formation of LLCs, but often discourages or even prohibits their use. So what makes California different in this regard? What industries does this affect? What's the basis for this treatment?


LLCs Prohibited in Certain Industries


I've posted before (both here and here), that California does not allow attorneys to form LLCs to provide legal services. This is not the case in other states (about half of states, including Texas, allow attorneys to form professional LLCs, or "PLLCs"). And this is true for other industries as well (for example, real estate brokers cannot operate as LLCs; see Bus. & Prof. Code section 10158 et seq.).


In California there are two primary sources for determining what trades or industries may or may not form LLCs:

  1. California's Revised Uniform Limited Liability Company Act ("LLC Act") (see especially Cal. Corp. Code section 17701.04); and

  2. The Business and Professions Code (pretty much in whole).


LLC Act


The LLC Act is open to all entities except those listed. It then explicitly precludes LLCs from being formed to operate as banks, companies issuing policies of insurance and assuming insurance risk, or companies acting as a trust company, among other industries.


The LLC Act then goes on to say that LLCs can only operate as authorized by the Business and Professions Code (and other narrower acts, such as those relating to, for example, osteopathy and chiropractic).


Business and Professions Code


The Business and Professions Code limits that broad allowance of the LLC Act. That is, if your profession requires a license, the Business and Professions Code has to state explicitly that you may form an LLC. Cal. Corp. Code section 17701.04.


Below are just a few examples of licensed industries which can operate as LLCs:

  1. Entities holding a gambling license (see Bus. & Prof. Code section 19890.5)

  2. Entities holding a liquor license (see Bus. & Prof. Code section 23591)

  3. Cemeteries, mortuary services, funerary services, etc. (see, for example, Bus. & Prof. Code section 7613.4, Health & Safety Code section 7018)

  4. Contractors (see Bus. & Prof. Code section 7065)

  5. Alarm companies (see Bus. & Prof. Code section 7590.1)

  6. Private investigators (see Bus. & Prof. Code section 7520.3)

  7. Cannabis businesses (see, in general, the Medicinal and Adult-Use Cannabis Regulation and Safety Act, at Bus. & Prof. Code section 26000 et seq.)

Why these industries and not others? I have some theories (see below).


Added Costs for Operating as an LLC


I've posted previously about the added costs for CSLB-licensed contractors who want to form an LLC. The largest added cost is the worker's compensation bond requirement, but insurance is more expensive as well.


I'm currently unaware of other industries explicitly discriminating against LLCs in this way. However, the construction industry employs approximately 5% of California's workforce. Thus, the added costs to LLCs create a barrier to formation of LLCs in one of California's largest industries.


No Domestic Series LLCs


In addition, California still does not allow for the formation of series LLCs.


Although California now lets foreign series LLCs operate in California, they may only do so by registering each series as a separate LLC. And that is the only concession California has made regarding series LLCs.


Why does California limit what businesses can operate as LLCs?


This is my own speculation, but I believe it stems from legislative discomfort with LLCs when they were originally adopted in California in 1994. LLCs are fairly simple to form and require fewer formalities than corporations. This raised consumer protection and employee protection issues. Regarding contractors, there was previously concern that employees would have little remedy against an LLC employer. Perhaps this concern extends to other industries as well, and perhaps those concerns aren't as prevalent for the industries exempted (see above).


And my further speculation is that there is simply no (or little) constituency to push for equal treatment of LLCs. In fact, the opposite is often true (for example, the California Realtors Association lobbied against allowing real estate brokerage LLCs, resulting in the failure of AB 687, which previously had broad, bipartisan support).


Conclusion


California is a massive market. And one that is often (whether fairly or unfairly) viewed as being unfriendly to business. Legislators would do well to consider evening out some of the discrepancies as to how California statutes and regulations treat LLCs relative to other entities.

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