LEGAL ISSUES


Tips for Contractors: Converting From a Corporation to a Limited Liability Company


By Sean Thompson, OTMK Law


resulting contractor’s license implica- tions. Please consult your CPA for the nuances of LLCs versus other forms of business entities or the business and tax implications of converting to an LLC, which are not covered here.


T


LLCs Versus Corporations Tere are several advantages offered


by the LLC structure. First, LLCs offer limited liability to business owners, similar to that of a corporation. Second and probably most importantly, LLCs provide tax advantages in that the business can opt to essentially be treated as a partnership. Tird, LLCs offer their members increased flexibility in structuring their management, financial interests, and governance. Tese benefits were of little value to


California contractors until the passage of SB 392 in 2010, when California finally allowed contractors’ licenses to be issued to LLCs. As noted below, there are additional requirements for licensed LLCs, including heightened bonding and insurance requirements. Te last several years have seen


more and more contractors seek to take advantage of the LLC’s benefits. However, because of the heavy and particular regulation of contractors by the Contractors State License Board (CSLB), any transition from corporate status to an LLC must be done carefully to avoid potential pitfalls.


Importance of Timing Te most important aspect of this


conversion from an active contrac- tor’s perspective is timing. Contractors know all too well the importance of


18 May/June 2021


his article focuses on the conversion of an existing corpo- ration to an LLC and the


maintaining their license without interruption. In short, a contractor must be licensed at all times during the perfor- mance of a construction contract. In


theory, and subject to exceptions, a contractor can be barred from receiving payment or forced to disgorge all money received if there is even a small gap in licensure. Once the conversion paperwork is


filed with the Secretary of State, the corporation becomes an LLC. However, the contractor’s license is still in the corporation’s name, which creates the risk that the entity actually performing the work will not be considered licensed. Te timing of effecting the


conversion is not unlike the movie Raiders of the Lost Ark, where Indiana Jones seeks to steal an Amazon tribe’s golden bust treasure from a hidden cave. He must remove the idol from its pedestal while, at the same exact time, replacing it with something of equivalent weight so as not to set off the pedestal’s keen weight sensors, which will activate a complex system of mechanical traps, such as poison darts, death-spike walls, and a giant rock ball. Similarly, contractors must accomplish the conversion and license reassignment seamlessly and without interruption or face only slightly less frightening consequences.


Preparatory Work Because of the steps involved, this


transition should be planned out at least


a month in advance. First, the contractor or its counsel


should contact a licensing deputy, explain what they want to accomplish, and discuss a timeline for doing so, including identification of the exact day they want the conversion and reassignment to occur. Te contractor should make sure


that the personnel of record listed with the California Secretary of State matches the personnel listed with the CSLB. Discrepancies should be resolved before submitting the conversion paperwork. It is likely that the CSLB will allow


the contractor to set up a pending appli- cation fee number upon the submission of most of the license reassignment


paperwork. Tis paperwork will include:  A letter requesting reassignment of the license to the LLC.


 Application for contractor license plus appropriate fees.


 Request for License Number Reissuance.


 New contractor’s bond or certified check for $15,000.


 LLC Employee/Worker Bond or certified check in the amount of $100,000.


 Certificate of liability insurance showing the CSLB as the certif- icate holder.


 Certificate of workers comp insurance or exemption form.


It may also be advisable to document


in writing the entity conversion with owners or other contractors on active projects. Tis may not be contractually or legally necessary, since the law provides that, after conversion, the new entity is the same as that which existed before the conversion, apart from the entity change. But an amendment or change order to existing contracts


California Constructor


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