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Oct
20 • 2015
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What Are The Consequences If An LLC Renders Professional Or Nonprofessional Services That It Is Not Authorized To Render Under California Law?

The California Revised Uniform Limited Liability Company Act specifically prohibits a limited liability company (or “LLC”) from rendering professional services that may be lawfully rendered only pursuant to a license, certificate, or registration authorized by the Business and Professions Code, the Chiropractic Act, the Osteopathic Act, or the Yacht and Ship Brokers Act.[1] The revised LLC Act also prohibits an LLC from rendering nonprofessional, occupational services that may be lawfully rendered only pursuant to a license, certificate, or registration authorized by the Business and Professions Code or one of those other statutes unless the applicable provisions of the statute specifically authorize an LLC to hold that license, certificate, or registration.[2] There are many businesses and occupations that must be licensed under the Business and Professions Code as to which the statutes do not specifically authorize an LLC to hold the license. See, “What Professional Or Nonprofessional Services May Be Provided By A Limited Liability Company In California?.  So the question is what if someone renders services through an LLC that are not authorized to be rendered through an LLC under California law?

The first consequence may be criminal liability. It is generally a misdemeanor offense for any person to practice, offer to practice, or advertise any “business, trade, profession, occupation, or calling” for which a license, registration, or certificate is required by any California law without holding a current and valid license, registration, or certificate.[3] A number of other provisions also specify a criminal penalty for engaging in a particular business, profession, or occupation without the required license.[4] And many of the statutes making it unlawful for a person to engage in a particular business, profession, or occupation without a license specify that the term “person” includes a limited liability company.[5] So the LLC itself can probably be held criminally liable for engaging in a particular business without a license.[6] The LLC’s criminal liability may extend to individual members and/or officers of the LLC who aided and abetted the LLC in committing the violation and acted with the requisite criminal intent.[7]

The imposition of criminal liability may have another serious consequence as well. Most liability insurance policies contain an exclusion for intentional or criminal acts by the insured.[8] While it is the act of providing a service through an unlicensed LLC that gives rise to criminal liability, rather than any negligence in the actual provision of the service, the LLC’s insurer might attempt to deny coverage for a claim by the LLC relating to the provision of the service under the criminal-act exclusion if the LLC is unlicensed.

Another significant problem is that an LLC that renders services it is not authorized to render probably cannot recover fees charged for providing those services. The rule in California is that a contract made in violation of a regulatory statute is void.[9] This means that where a statute, like many provisions in the Business and Professions Code, requires that a person obtain a license before offering or performing certain services, and provides a penalty for not getting the license, “the contract of an unlicensed person to perform such services will not be upheld.”[10] In other words, a court will not aid the unlicensed person in attempting to enforce the void contract to recover unpaid fees for services rendered in violation of the licensing statutes.[11] This could mean a lot of money lost on account of services rendered by an unlicensed LLC.

Finally, in addition to individual criminal liability for members and/or officers who knowingly participate in the LLC’s crime of offering or providing services for which a license is required without a license, it could be argued that members and/or officers could also be individually liable for any debts incurred by the LLC in connection with providing those services. One of the primary reasons for forming a business entity such as a corporation or an LLC is to protect the individual shareholders or members from liability for the entity’s obligations. But that protection can be lost through a process known as “piercing the corporate veil.” See, “Understanding How Courts Pierce The Corporate Veil”

The revised LLC Act specifically provides that a member of an LLC shall be subject to liability under the common law governing alter ego liability, and shall also be personally liable . . . for any debt, obligation, or liability of the limited liability company, whether that liability or obligation arises in contract, tort, or otherwise, under the same or similar circumstances and to the same extent as a shareholder of a corporation[.]”[[12]]

Under the alter ego doctrine, a court will ignore the business entity and deem its acts to be those of its shareholders or members if the business form is “used to perpetrate a fraud, circumvent a statute, or accomplish some other wrongful or inequitable purpose[.]”[13] If an LLC is formed to provide services that an LLC is not authorized to provide under the Business and Professions Code, then it has arguably been used to circumvent a statute or accomplish some wrongful purpose. But there is a second requirement for imposing alter ego liability: “there must be such a unity of interest and ownership between the corporation and its equitable owner that the separate personalities of the corporation and the shareholder do not in reality exist[.]”[14] Various factors are examined to determine whether there is a “unity of interest,” including inadequate capitalization.[15] So as long as the members treat the LLC as a separate entity, they should be safe from individual liability under the alter ego doctrine, but they should be aware of the issue.

[1]See Cal. Corp. Code §§ 13401(a), 13401.3, 17701.04(e).

[2]See id. § 17701.04(b).

[3]Cal. Bus. & Prof. Code § 16240. Where the punishment for a misdemeanor is not prescribed by the statute declaring the act to be a criminal offense, the punishment is imprisonment in the county jail not exceeding six months, or a fine not exceeding $1,000, or both. Cal. Penal Code ‘ 19.

[4]See, e.g., Cal. Bus. & Prof. Code § 2052(a) (any person who practices, attempts to practice, or advertises without a medical license is punishable by a fine not exceeding $10,000, or imprisonment not exceeding one year, or both).

[5]See, e.g., id. § 2032 (defining “person” to include an LLC); id. § 5219 (“person” includes a limited liability company); id. § 5301 (prohibiting any person from engaging in the business or occupation of outdoor advertising without a license).

[6]See Cal. Penal Code § 7 (as used in the Penal Code, the word “person” includes a corporation as well as a natural person); id. § 27(a)(1) (all persons who commit a crime in the state are liable to punishment under California law); Granite Constr. Co. v. Superior Court, 149 Cal. App. 3d 465, 467, 197 Cal. Rptr. 3, 4 (5th Dist. 1983) (corporations are proper criminal defendants); People v. Schomig, 74 Cal. App. 109, 112, 239 P. 413, 414 (1st Dist. 1925) (a corporation cannot be imprisoned, but it can be fined for doing business without a license).

[7]See Cal. Penal Code § 20 (“In every crime or public offense there must exist a union, or joint operation of act and intent, or criminal negligence.”); id. § 31 (“All persons concerned in the commission of a crime, whether it be felony or misdemeanor, and whether they directly commit the act constituting the offense, or aid and abet in its commission, . . . are principals in any crime so committed.”); Schomig, 74 Cal. App. at 112, 239 P. at 414 (a corporation’s “officers and agents through whose efforts the commission of the criminal act has been accomplished may be held criminally responsible as coprincipals with the corporation”); 62 Op. Cal. Att’y Gen. 336, 1979 WL 29241, at *3 (1979) (“[o]ne may be guilty of a crime by aiding and abetting an unlicensed person engaged in the activity for which a license is required,” so long as the aider and abetter acts “with guilty knowledge of the wrongful purpose of the perpetrator”).

[8]See, e.g., Farmer ex rel. Hansen v. Allstate Ins. Co., 311 F. Supp. 2d 884, 894 (C.D. Cal. 2004), aff’d, 171 F. App’x 111 (9th Cir. 2006).

[9]See MW Erectors, Inc. v. Niederhauser Ornamental & Metal Works Co., 36 Cal. 4th 412, 435, 115 P.3d 41, 55 (2005).

[10]Id. at 435-36, 115 P.3d at 55; see also Loesch v. Bartholomew, 5 Cal. App. 4th Supp. 8, 13, 8 Cal. Rptr. 2d 27, 30 (Dep’t Super. Ct. 1992) (“If the Legislature forbids the carrying on of business without the securing of a license and makes such action a criminal offense, any contract involved is void.”).

[11]See Smith v. Simmons, 638 F. Supp. 2d 1180, 1187 (E.D. Cal. 2009), aff’d, 409 F. App’x 88 (9th Cir. 2010).

[12]Cal. Corp. Code ‘ 17703.04(b).

[13]Sonora Diamond Corp. v. Superior Court, 83 Cal. App. 4th 523, 538, 99 Cal. Rptr. 2d 824, 836 (2000).

[14]Id.

[15]Id. at 539, 99 Cal. Rptr. 2d at 836. One factor relevant to corporations that cannot be considered in the context of an LLC is the failure to hold meetings of members or managers of the LLC or the failure to observe formalities pertaining to the calling or conduct of meetings. Cal. Corp. Code ‘ 17703.04(b). For a more complete list of the factors considered by a California court in deciding whether to pierce the corporate veil, see “Piercing the Corporate Veil: A Rare And Drastic Result.”