Many contractors that were planning on starting an LLC (Limited Liability Company) in California found that they were legally unable; but a new bill has changed that. Legislators put a new law in to place allowing contractors to operate as an LLC but in order to do so; they must obtain a large surety bond.
Senate Bill 392 requires any contractors who want to start a LLC to obtain a $100,000 surety bond in addition to the $12,500 contractor bond that’s already required. The new bond is for the benefit of any employee affected by an LLC’s failure to pay wages or fringe benefits.
In the past, contractors starting LLC’s were not able to get a contractor license in the state of California. Now the only way to do so is to obtain the $100,000 bond on top of the $12,500 contractor license bond that is already required of California contractors. If all goes as planned, the CSLB (Contractors State License Board) should be accepting applications from LLC applicants by the January 2012 deadline.
Any contractors aspiring to start an LLC will not be taking this new $100,000 bond requirement lightly simply because it will be costly. Surety bond pricing is based off a percentage of the bond amount (roughly 2-20%) which is calculated by the contractor’s credit history and financial strength. Even if a contractor is financially sound and qualifies for a low rate e.g. 2%, they will still have to pay $2,000 for the bond!
Although it’s unclear why California contractors have been unable to open an LLC in the past, they will be able to in the near future; but it could very well end up being costly which may drive contractors from even considering the option of an LLC at all.