California has a love/hate relationship with the LLC. In a previous post, I pointed out that the California Contractors State License Board ("CSLB") imposes added requirements and costs for contractors who operate as an LLC. But why?
History of LLCs
Wyoming was the first state to adopt a statute allowing for the creation of LLCs. By 1996, all 50 states had an LLC statute.
In 1994, California adopted its own, called the Beverly-Killea Limited Liability Company Act ("LLC Act"). The LLC Act allowed for the formation and operation of LLCs in California. The LLC Act allowed LLCs to operate for any lawful purpose. However, at the time, California's Contractors State License Law (now Bus. & Prof. Code sections 7000 through 7191) only allowed individuals, partnerships, and corporations to obtain licenses (corporations, as opposed to LLCs, are very old, dating back to medieval Europe, with even older antecedents).
In 2011, Senate Bill ("SB") 392 went into effect, adding LLCs to the approved list for CSLB licensing. See Bus. & Prof. Code section 7065(b). It passed unanimously, and you can read it here. But still, why the added requirements?
The Text
The stated intent lays it out pretty clearly. Section 1 of SB 392 gives the most likely reason: "...contractors have been allowed to operate as corporations...for many years, with well-established case law regarding the ability to pierce the corporate veil. It is the intent of the Legislature that this doctrine shall also apply to limited liability companies. Because there is not yet case law establishing this principle in California, the additional one-hundred-thousand-dollar ($100,000) bond requirement for the benefit of workers relative to payment of wages and fringe benefits will ensure that workers are protected despite the absence of case law dealing with limited liability companies" (emphases added).
The legislators sponsoring SB 392 explicitly stated that their concern had to do with the availability of legal remedies against the LLC. Recall that many people form LLCs specifically for the liability shield it offers. But California's legislature worried that courts might not have the same veil piercing approach to LLCs as they do to corporations.
Why are they still required?
California's first LLC Act was adopted in 1994. SB 392 set forth these concerns in 2010. As of the date of this post, there is a substantial body of California case law involving LLC veil piercing (and explicitly in California's statutes).
So why have the added requirements in 2022, when there is a substantial body of case law? I haven't been able to find a good answer. But I'm happy to speculate.
First, legislation moves slowly (especially when there isn't much demand, or it's an issue that isn't particularly exciting). So it's possible that there just isn't a large constituency for getting rid of the requirements.
Second, California isn't known for being the most business-friendly state. It may be that the legislature would rather add the same requirements to corporations (and perhaps other licensees as well) rather than remove them for LLCs, and they simply haven't done so (for the same reasons as my first guess).
Third, the legislature is not satisfied that the body of case law for LLC veil piercing is substantial enough. I think this is unlikely, but that may be the case.
Ultimately, I think the first is the most likely. The legislature doesn't do everything it wants to do every session. If legislators aren't under constant and frequent pressure to change laws, they might not do it (the squeaky wheel gets the grease; and the current "squeaky wheels" in California are things like the climate, education, and crime). It simply isn't at the forefront of the legislators' minds.
Conclusion
So there you have it. The added requirements are due to the perceived lack of case law for "piercing the LLC veil" (although it only mentions the wage bond, it's safe to assume that the other requirements stem from the same concern). If there is a good reason for maintaining the added requirements, I haven't seen heard it.
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