A common inquiry I’ve come across throughout the years concerns the choice between setting up a construction company as an LLC or as a corporation. The distinction between the two is crucial, and I’d like to provide clarity on this topic, especially given the California-specific intricacies.
History of LLCs in California
For context, the LLC structure was introduced to the state of California’s Contractor State License Board (CSLB) in 2012. This move was primarily to facilitate foreign companies, many of which were LLCs, to register their businesses in California. The idea was for these companies to maintain their LLC status across various states, thereby enabling them to be licensed uniformly under the same structure.
What You Need to Know About the LLC Setup
The catch with the 2012 introduction was that LLCs were required to have a $100,000 employee worker bond. They were also obligated to maintain liability insurance. The primary reason behind these requirements was to ensure construction companies did not leave California without paying their employees and to enforce some accountability level. If you’re an out-of-state contractor looking to work in California, this framework was designed with you in mind.
Why Corporations Might Be More Suitable for California Residents
Many individuals often opt for an LLC setup because their consultants or tax advisors recommend it, perhaps due to tax benefits or reduced expenses. However, these consultants might not be fully versed with the CSLB’s specific rules. The central advantage of choosing a corporation over an LLC if you’re a California resident lies in the financial aspect: corporations aren’t mandated to purchase the hefty $100,000 employee worker bond annually, potentially saving between $2,000 to $10,000. Moreover, corporations aren’t obligated to maintain liability insurance.
Switching from an LLC to a Corporation: Is It Possible?
Yes, it is. If you’ve already initiated the application process with the CSLB under an LLC, you can alter your decision. You can choose to either withdraw or convert the LLC into a corporation. Depending on the circumstances and who you’re collaborating with, the CSLB might even allow you to transition from an LLC to a corporation without necessitating a new application submission.
Conclusion: Why the Distinction Matters
To recap, understanding the differences between an LLC and a corporation when dealing with the CSLB is vital. Many non-specialists in the construction domain remain unaware of the bond and insurance obligations tied to an LLC, leading to unnecessary expenditure. Opting for a corporation can sidestep these costs.
Thank you for tuning in. For further insights, feel free to explore my other posts. Should you have any queries on this topic, don’t hesitate to reach out via contact or email.