More often than not, my clients have a specific entity in mind before they contact me. That's fine; they're often right. And they usually request a limited liability company (LLC). California LLCs, as compared to corporations, are often cheaper to form, maintain, and wind up.
However, this is not true for all industries. In particular, contractors licensed by California's Contractors State License Board (CSLB) should consider forming a corporation instead of an LLC.
Why should California licensed contractors form a corporation instead of an LLC? Well, consider some of the CSLB requirements for LLCs to obtain a license:
A $100,000 surety bond (in addition to, not in place of, the $15,000 contractor bond) for the benefit of any employee or worker damaged by the LLC’s failure to pay wages, interest on wages, or fringe benefits;
$1 million liability insurance minimum (cumulative) for licensees with five or fewer members (and an extra $100,000 per member above that, maxing out at $5 million);
Every officer, member, responsible manager, or director must be listed on the application (the language of Cal. Bus. & Prof. Code section 7065 does not include the word "shareholder");
$1 million personal liability while suspended by the California Secretary of State.
These and other requirements are listed on the CSLB's website here. The applicable statutes are in California's Business and Professions Code, specifically sections 7065 to 7077, available here.
Bear in mind that there are other factors to consider when selecting an entity. But for many CSLB-licensed contractors, this can be the deciding factor.
Quick Summary: Due to the CSLB-imposed requirements on LLCs, contractors licensed by the CSLB should consider forming corporations rather than LLCs to receive the benefits of limited liability.
Further Research: At some point, I plan on explaining why the California legislature treats LLCs this way. I will also give a brief overview of the conversion process for those LLCs which want to convert to corporations.
Update (January 12, 2022): My post outlining the conversion process is here.
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