The "Business Organization and Licensing" section, comprising 13% of the law and business exam, is essential for contractors to grasp the legal, organizational, and operational aspects of managing a construction business. It covers key topics such as different business structures, including sole proprietorships, partnerships, corporations, and LLCs, as well as the crucial licensing requirements and the role of qualifying individuals. The section also delves into advertising regulations, maintaining a valid license, and the responsibilities of contractors. Additionally, it emphasizes the importance of project management, including proper planning, scheduling, and supervision, which are vital for legally and effectively operating within the regulatory framework.

Business Organization

An average contractor gains expertise from hands-on experience in various stages of construction. Simultaneously, it's crucial for a contractor to be capable of managing a business, coordinating employee tasks, material allocation, and training. They should also offer guidance to both supervisory and non-supervisory employees.

This section will further discuss effective strategies for managing a business and its workforce.

Business Organization

'Organization' is a general term for a group of individuals with a specific purpose and structure. 'Business,' on the other hand, specifically refers to a professional, commercial, or industrial entity. Therefore, 'business organization' translates to a single person or a team working collaboratively to achieve specific business goals. Some business organizations are profit-driven, designed to generate income for their owners, while others, known as 'nonprofit organizations', serve public interests.

Business Plan

A business plan is crucial for a business's sustainability as it outlines a success strategy and provides a growth blueprint. It serves as a reference point, detailing a company's financial status. A business plan is a documented summary of a business's operational and financial goals for the upcoming period and strategies to achieve these goals. It identifies potential challenges and feasible solutions. Further, it outlines the business's organizational structure and needed capital.

To secure a loan or attract investors, a contractor will need a business plan. A typical business plan includes a cover page, the company's legal structure, details about facilities, services offered, a target market analysis, a strategy to leverage the target market, and financial statements (if available).

Service Plan

A company's business plan also includes a service plan that elaborates on a specific target market and the capacity to serve that market. In the construction sector, establishing robust relationships with customers indicates a company's commitment to providing solutions in an ever-evolving world.

Company Organization

Deciding the legal structure of a firm is one of the first steps before launching any business. This structure depends on the business's nature and determines the availability of finance, individual liability, and control. Transforming from one business form to another is seen as a chain growth process. For instance, a sole proprietor may need extra capital for growth and may form a partnership or a corporation to secure additional financing. Each business structure has its own set of pros and cons. This section provides examples of different business options available to a business owner.

Sole Proprietorship

A sole proprietorship is a business structure where a single individual owns the entire business equity and bears full responsibility for the business’s debts and liabilities. This business type is the simplest and easiest to establish and demands minimum regulation. In a sole proprietorship, the business isn't a separate legal entity; the owner is personally accountable for all financing. No legal paperwork or requirements are needed to start a sole proprietorship.

Advantages:

• Full ownership and autonomy in decision-making
• Simple ownership structure with minimal legal constraints
• Minimal start-up capital required
• Owner retains all profits
• No corporate tax

Disadvantages:

• Unlimited liability – the owner is personally liable for business debts
• Limited lifespan – the business ceases to exist when the owner dies
• Limited capital generation for growth and achieving targets
• Less attractive to investors

Partnership

A partnership is a form of business in which two or more people share ownership and management responsibilities. The business name of the partnership needs to be registered officially. An agreement among the partners stipulates their rights and duties related to sharing of profits or losses and other business activities.

A partnership agreement usually terminates when a new partner joins or when an existing partner withdraws or passes away. This termination can be circumvented with a prior written agreement for the continuation of the business. It's important to note that if there are any changes in the partnership, such as withdrawal of a current partner or addition of a new one, the contractor's license issued to this business form expires and a new license must be secured within 90 days.

Similar to a sole proprietorship, a partnership is not a separate legal entity for the partners. Taxes are imposed on each individual's share of the profit and are reported as personal income. Partnerships can either be general or limited:

• In a general partnership, each partner is responsible up to the extent of their personal assets and is legally accountable for the negligent actions of other partner(s).
• In a limited partnership, partners do not bear full business liability and are responsible only up to the amount of their initial investment. It's crucial to note that in a limited partnership, at least one general partner must assume full liability for business operations and liabilities.

Advantages:

• A partnership is easy to set up; start-up costs are relatively low.
• Profits are shared amongst partners.
• Capital and expertise from multiple sources mitigate individual risk.
• Business affairs are private; external regulations are limited.

Disadvantages:

• General partners carry liability beyond their original investments.
• Limited life – business dissolves if a partner withdraws, dies, or if a new partner is added.
• Risk of disagreements and resistance among partners on business affairs since decisions are shared.
• Each partner is liable for the actions and losses incurred by the other partner(s).

Business Structure

Before initiating any business, one of the earliest decisions involves choosing the legal structure of the firm. This decision influences aspects such as the ability to secure financing, individual liability, and governance control. A business may evolve from one form to another as part of a growth strategy. For instance, a sole proprietor might require more funds to fuel growth, leading to the formation of a partnership or a corporation to access more capital. Each business structure brings its unique benefits and drawbacks. The following sections will explore different business options accessible to a potential business owner.

Individual or Sole Proprietorship

In a sole proprietorship, a single individual owns the entirety of the business's equity and bears sole responsibility for any debts and liabilities the business accrues. This business form is often seen as the simplest and most straightforward to set up, requiring minimal regulation. A sole proprietorship does not constitute a separate legal entity; the owner is personally accountable for all finances. Starting a sole proprietorship does not necessitate any legal paperwork or requirements.

Advantages:

• Complete control of the business and sole decision-making power
• A simple form of ownership, carrying minimal legal restrictions
• Less capital is required for start-up
• The owner enjoys the profit solely
• There is no corporate tax

Disadvantages:

• Unlimited liability – the owner is personally liable for business liabilities
• Limited life – the business dissolves once the owner passes away
• Less capital is generated to maintain growth and achieve set targets
• Investors are unlikely to invest in this type of business

Partnership

A partnership is a business structure where two or more individuals jointly own and operate the business. The business's name must be officially registered. A partnership agreement outlines the rights and responsibilities of the partners, which includes sharing profits or losses and the handling of other business affairs.

In many instances, a partnership agreement terminates when a new partner joins or when an existing partner leaves or dies. However, a prior written agreement can prevent this termination and allow the business to continue. Importantly, if there are any changes in the partnership, such as the departure of a current partner or the addition of a new one, the contractor's license issued to such a business entity expires, and a new license must be secured within 90 days.

A partnership, similar to a sole proprietorship, is not a distinct legal entity for the partners. Each partner's share of the profit is taxed and reported as personal income. Partnerships can either be general or limited:

• In a general partnership, each partner is legally accountable for the negligent actions of other partners and liable to the extent of their personal assets.
• In a limited partnership, the partners are only responsible up to the amount of their initial investment. However, at least one general partner in a limited partnership must accept full responsibility for business operations and liabilities.

Advantages:

• A partnership is easy to set up; start-up costs are relatively low.
• Profits are shared amongst partners.
• Capital and expertise from multiple sources mitigate individual risk.
• Business affairs are private; external regulations are limited.

Disadvantages:

• General partners carry liability beyond their original investments.
• Limited life – the business dissolves if a partner withdraws, dies, or if a new partner is added.
• Risk of disagreements and resistance among partners on business affairs since decisions are shared.
• Each partner is liable for the actions and losses incurred by the other partner(s).

"C" Corporation

A "C" Corporation is an independent legal entity that can be composed of one or multiple individuals. To establish a corporation, individuals must file articles of incorporation with the Secretary of State. A "C" Corporation has a governing body of officers, including a President, Secretary, and Treasurer, and can be owned by one or multiple shareholders. Government approval is required to form this legal entity, which allows a corporation to create and enter contracts.

"C" Corporations are legally responsible for their operations and their earnings are taxed separately. They can sell stocks to private or public investors to generate capital. Shareholders' liabilities are limited to their investment amount. A "C" Corporation continues to exist even after the death of one or more shareholders or the sale of stocks.

Pros:

• Provides a legal existence to a business
• Offers limited liability for investors
• Stocks can be sold without restrictions
• Offers different share classifications
• Has an unlimited lifespan; dissolution is decided by shareholders
• Higher availability of capital for further growth
• Ownership can be acquired by simply buying shares

Cons:

• Double taxation is inevitable; taxes are imposed on both business and individual dividends
• Has a complex structure that is costly to establish
• Has many legal requirements, including strict rules and regulations for start-up and operations
• Unlike "S" corporations, it cannot deduct corporate losses

"S" Corporation

An "S" Corporation has unique tax considerations that set it apart from a "C" Corporation. "S" Corporations are not subjected to double taxation. "S" Corporation status can only be granted if the corporation is domestically held, has a single class of stock, and only permits individuals and certain trusts and estates to become shareholders. An "S" Corporation's business income is reported as individual income and is taxed in the same way as a partnership business, despite operating in a corporate form that limits the owner's liability. An "S" Corporation cannot have more than 100 shareholders, and all shareholders must agree to the "S" Corporation status.

Advantages:

• More attractive to small business owners than “C” Corporations
• The shareholders and management have limited liability protection
• Carries the advantage of pass-through taxation for its members; taxed as a partnership
• This form of business has a perpetual existence

Disadvantages:

• Can only utilize domestic capital, as membership is limited to U.S. citizens and permanent residents
• Maximum of 100 shareholders
• Receives closer scrutiny from the IRS; has complex tax qualification requirements
• “S” corporations have yearly tax filing requirements

Limited Liability Company (LLC)

A Limited Liability Company (LLC) is a business structure that offers members (owners) protection from personal liability for the organization's debts and liabilities. This structure differs from many corporations as it does not provide liability protection for personal actions.

An LLC shares many of the same legal protections as a “C” Corporation, but it avoids double taxation. Federal taxes are assessed on the profits distributed to members. An LLC also necessitates less paperwork and regulation compared to “C” Corporations.

Pros:

• Members' information is less publicly exposed
• There are fewer documentation and paperwork requirements
• Financial reports are kept private
• Liability is limited for managers and members
• No entity-level taxation

Cons:

• Profits must be immediately recognized by LLC owners
• LLCs offer fewer fringe benefits for owners and managers
• If a member exits the LLC, it usually dissolves
• Profits from LLCs are subject to Medicare and social security taxes

There are also additional licensing requirements for LLCs:

• A $100,000 surety bond is required (in addition to the necessary contractor bond) in case the LLC fails to pay wages.
• Every individual in an LLC (officer, member, responsible manager, or director) must be listed as personnel of record.
• Liability insurance with a collective limit of $1 million is necessary for a licensed LLC with 5 or fewer members. For every additional personnel of record, an extra $100,000 is required, up to a total of $5 million.
• An LLC can serve as a partner in a partnership license or be part of a joint venture.
• Most of the requirements and provisions applicable to corporate licenses also apply to LLCs.

Joint Ventures

Joint ventures are formed when two or more organizations decide to collaborate on a specific project. The participating companies share the returns, risks, and governance in a newly created entity that can be managed as a corporation, LLC, or partnership.

Joint Venture License

A joint venture license application is a document submitted by two or more distinct licensees who wish to collaborate on contract work. It is not necessary to take an exam or have a qualifying individual to obtain this type of license, as only currently licensed businesses are allowed to participate. Under this license, separate businesses can collaborate; the license must be renewed every two years, similarly to a standard contractor’s license.

Project Management

The success of a project is heavily influenced by its management. The task of project management is deemed the most challenging in a construction project, necessitating not only managerial abilities but also an in-depth understanding of the design and construction processes. A project manager (PM) is responsible for maintaining the project's timeline through efficient scheduling, often juggling multiple projects in different stages. A proficient project manager must give due consideration to the following critical aspects:

• Restrictions on budget
• Maintaining quality standards
• Effective planning, detailing, and coordination
• Efficient handling of resource management

Project Manager (PM) -  Traits and Duties

The project manager serves as the central liaison with the owner and can be either the business proprietor or a staff member of the construction management firm. The project manager must possess the requisite expertise and technique to supervise multiple phases of construction, typically acquired through direct experience. The pivotal factor for successful project management is the capacity to assess existing data and make well-informed decisions.

Project management entails the orchestration of workforce and resources to ensure the successful completion of a project. The theory of management can be bifurcated into two categories: functional and behavioral.

Functional Management

Functional management involves the technical aspects of business, such as:

• Planning: Creating budgets and schedules. Effective planning is essential for ensuring the availability of resources, including finances, personnel, and equipment.
• Delegation: Educating staff to manage day-to-day decision-making. It's the manager's duty to make sure that routine decisions align with the project's broader plans.
• Standardization: Operations should be standardized to achieve maximum efficiency and to delegate responsibilities effectively.
• Controls: Keeping track of job tasks, monitoring progress, and identifying early warning signs to prevent situations from spiraling out of control. Comparing real-time progress with planned outcomes allows the Project Manager (PM) to assess progress.

Behavioral management

Behavioral management relates to the personnel side of a business.  A construction PM works in close coordination with the project superintendent and workers to ensure smooth site activity functions.

• Human Relations: Businesses depend upon the proper treatment of personnel.
• Cooperation: Project completion must be a common goal. Good leadership can ensure that individuals work together to produce more than the sum of their individual parts.
• Responsibility: Each individual in a business should be given authority over, and held accountable for, one or more phases of the project. This falls under the delegation of responsibility and authority.
• Communication: Communication is crucial to improving morale and productivity. Individuals should be advised of any decisions that affect them personally.
• Executive Ability: As the size of a business increases, the contractor must spend more time in a managerial role. Oftentimes, the project will run more smoothly when the manager does not have to supervise routine work. Once standards, plans and controls are put into place, the manager may focus on exceptions to normal operation.

These principles are common sense, but do not occur automatically.  Managers should consider the following questions:

• Are all jobs carefully planned in advance?
• Is each worker in the right place with the proper training?
• Are the best possible practices established as standards for all routine operations?
• Is the business capable of rapidly adapting to changing conditions?
• Does each worker have the required materials, supplies, and equipment to complete the job effectively?
• Is each worker’s chain of command clear?
• Does every worker clearly understand the assigned task, and the start and completion schedule for that task?

If the answer to any of these questions is ‘no’, then the manager should review the situation and take any corrective action needed.

Project Supervisors and Managers

The size of a project often dictates the need for a supervisory team. This team works in tandem with the project manager, overseeing the day-to-day progress of the project.

Superintendent

The superintendent is responsible for overseeing the daily operations and progress of the project on behalf of the project manager. Their role is crucial in ensuring the project stays on schedule and within the allocated budget. They also maintain general project records and manage the short-term scheduling of tasks.

Foreman

Reporting directly to the superintendent, the foreman assists with the day-to-day activities of the project. Their responsibilities include overseeing specific trade sectors, estimating the materials, equipment, and supplies needed for daily operations, and assigning tasks to the crew as necessary.

The foreman is also responsible for evaluating the performance of workers and subcontractors, creating schedules based on these evaluations, managing work orders, overseeing worker training, recording accidents, and keeping track of timesheets.

Arranging Job Timelines

Achieving efficiency in a construction project requires careful coordination of all stages to avoid unnecessary delays. Fast completion of projects without unnecessary holdups is crucial as delays can lead to other complications and decrease the profitability of the business. Implementing a robust job scheduling system enables a company to manage its workflow effectively, enhancing performance and monitoring of specific tasks. Prior to selecting a scheduling method, the following steps should be undertaken:

• Review the bid, including job specifications and plans. Break down the project into sections and determine the timeline for the completion of each section.
• Schedule the entire project, not just individual activities.
• Enumerate items that need to be ordered in advance, such as wallpaper, windows, carpet, appliances, and plumbing fixtures, among others.
• Anticipate potential challenges that might arise during the project.

Contractors have three basic scheduling systems at their disposal: the bar chart, the calendar planner, and the critical path method.

Calendar Planner

Among the systems, the calendar planner is the simplest and works well for smaller jobs and businesses. It involves recording the estimated start and end dates of each phase of the project, along with the corresponding time periods, on a calendar. While the calendar planner is user-friendly, it has certain drawbacks. For instance, it does not provide an overarching view of how different phases of a project interrelate or how a delay in one phase could impact the overall project.

Gantt or Bar Chart

Alternatively, a Gantt or Bar chart can be employed, which utilizes a linear grid layout (see Figure 1.1). Each project phase is listed vertically, while the dates are represented horizontally. A horizontal bar marks the expected duration of each phase. Once finalized, this chart illustrates the interconnection between all phases and indicates which phases exceeded their estimated timeframes.

Crucial Pathway Method (CPM)

The last technique under discussion is the Crucial Pathway Method (CPM). While this approach is the most intricate, it is also the most advantageous. The CPM utilizes a diagram to break a project down into its components and the sequence of tasks that need to be accomplished before the next can start. This method offers a comprehensive view of the interconnected phases. Among the different routes that constitute the project, the crucial pathway is the longest in terms of completion time. This path is considered crucial as any setbacks on this route will delay the entire project.

The diagram in Figure 1.2 illustrates the Crucial Pathway Method. The critical path is highlighted. This is the minimum timeframe required to complete the project. It is vital to prevent task delays to ensure the project is completed on time.

Licensing Requirements

License Classifications

In the realm of construction licensing laws, the terms ‘builder’ and ‘contractor’ are frequently used interchangeably. Both these terms denote individuals or entities who own and/or operate a construction business. Their operation spectrum is comprehensive, involving the construction and improvement of a variety of infrastructures.

These include, but are not limited to, buildings, parking facilities, railroads, roads, and water wells. They also take on projects involving mobile homes, scaffolding, and an array of internal or domestic fixtures. These fixtures range from kitchen and bathroom cabinets to general fixtures, and mechanical equipment such as HVAC systems.

The classification of contractors is a systematic process that takes into account their particular trades and skills. These classifications have been meticulously structured to align with established usage and procedures prevalent within the construction industry. As a result, it ensures a smooth workflow and seamless interaction between different entities involved in a construction project.

These classifications are divided into three major license types: General Engineering Contractor, General Building Contractor, and Specialty Contractor. Each of these licenses types represents a specific set of skills, expertise, and responsibilities within the construction industry.

A General Engineering Contractor is typically involved in fixed works that require specialized engineering knowledge and skill. This may include projects related to infrastructure such as highways, railroads, and bridges.

A General Building Contractor usually oversees the construction of buildings and structures that are meant for use and occupancy. They are also involved in remodeling or adding to existing structures.

Lastly, a Specialty Contractor is a contractor who is specialized in performing construction work relating to a specific type of construction activity. This might include tasks such as electrical, plumbing, or roofing work.

In conclusion, understanding the different license classifications in the construction industry is crucial for the smooth operation of construction projects, ensuring that each task is carried out by professionals with the appropriate skills and expertise.

A – General Engineering Contractor

A general engineering contractor primarily operates in fixed works requiring specialized knowledge and skills in the field of engineering. This covers areas such as those listed below.

• Irrigation
• Drainage
• Water power
• Water supply
• Flood control
• Inland waterways
• Harbors
• Docks and wharves
• Shipyards and ports
• Dams and hydroelectric projects
• Levees
• River control and reclamation works
• Railroads
• Highways
• Streets and roads
• Tunnels
• Airports and airways
• Sewers and sewage disposal plants
• Waste reduction plants
• Bridges
• Overpasses and underpasses
• Pipelines and systems for liquid and gas transmission
• Parks
• Playgrounds and recreational works
• Refineries
• Chemical plants and other industrial plants
• Power plants and utility plants
• Mines and metallurgical plants
• Land paving and surfacing
• Cement and concrete works

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B – General Building Contractor

A general building contractor is involved in the construction and improvement of support structures, which may also serve as shelters or enclosures. Their work includes the supervision of affiliated trades. However, a general building contractor is not permitted to bid for a contract unless it involves:

• Two unrelated trades, OR
• Framing or finish carpentry work.

If neither of these conditions is met, the contractor may still bid on the project if they hold specialty classifications or if the work is subcontracted to a specialty contractor involving only one trade.

Furthermore, the general building contractor cannot bid on a job that includes the "C-16" fire protection classification or "C-57" well-drilling classification, unless the contractor or their subcontractor holds the specific license for that classification.

C – Specialty Contractor

A specialty contractor focuses on a specific trade or craft. This classification is assigned a number based on the specialty, such as “C10 - Electrical Contractor” or “C11 - Elevator Contractor”. These specialty contractors are licensed to only perform work within their classification or directly related to it. Refer to the table below.

(A) General Engineering Contractor

(B) General Building Contractor

(C) Specialty Contractor

• C-2 - Insulation and Acoustical
• C32 - Parking and Highway Improvement
• C-4 - Boiler, Hot Water Heating, and Steam Fitting
• C33 - Painting and Decorating
• C-5 - Framing and Rough Carpentry
• C34 - Pipeline
• C-6 - Cabinet, Millwork, and Finish Carpentry
• C35 - Lathing and Plastering
• C-7 - Low Voltage Systems Contractor
• C36 - Plumbing
• C-8 - Concrete
• C38 - Refrigeration
• C-9 - Drywall
• C39 - Roofing
• C10 - Electrical
• C42 - Sanitation System
• C11 - Elevator
• C43 - Sheet Metal
• C12 - Earthwork and Paving
• C45 - Sign
• C13 - Fencing
• C46 - Solar
• C15 - Flooring and Floor Covering
• C47 - General Manufactured Housing
• C16 - Fire Protection
• C50 - Reinforcing Steel
• C17 - Glazing
• C51 - Structural Steel
• C20 - Warm-Air Heating, Ventilating, and Air-Conditioning
• C53 - Swimming Pool
• C21 - Building Moving/Demolition
• C54 – Ceramic and Mosaic Tile
• C22 - Asbestos Abatement
• C55 - Water Conditioning
• C23 - Ornamental Metal
• C57 - Well Drilling
• C27 - Landscaping
• C60 - Welding
• C28 - Lock and Security Equipment
• C61 - Limited Specialty
• C29 - Masonry
• ASB - Asbestos Certification
• C31 - Construction Zone Traffic Control
• HAZ - Hazardous Substance Removal Certification

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C61 – Limited Specialty Contractor

A limited specialty contractor specializes in areas that are not covered under the C2 – C60 classifications.

The CSLB has further broken down the C-61 classifications into “D” subcategories (D1 – D65), such as “D10 – Elevated Floors” and “D-12 – Synthetic Products” (see the below list).

• D-03 - Awnings
• D-04 - Central Vacuum Systems
• D-06 - Concrete-related Services
• D-09 - Drilling, Blasting, and Oil Field Work
• D-10 - Elevated Floors
• D-12 - Synthetic Products
• D-16 - Hardware, Locks, and Safes
• D-21 - Machinery and Pumps
• D-24 - Metal Products
• D-28 - Doors, Gates, and Activating Devices
• D-29 - Paperhanging
• D-30 - Pile Driving/Pressure Foundation Jacking
• D-31 - Pole Installation and Maintenance
• D-34 - Prefabricated Equipment
• D-35 - Pool and Spa Maintenance
• D-38 - Sand and Water Blasting
• D-39 - Scaffolding
• D-40 - Service Station Equipment and Maintenance
• D-41 - Siding and Decking
• D-42 - Non-Electrical Sign Installation
• D-49 - Tree Service
• D-50 - Suspended Ceilings
• D-52 - Window Coverings
• D-53 - Wood Tanks
• D-56 - Trenching
• D-59 - Hydroseed Spraying
• D-62 - Air and Water Balancing
• D-63 - Construction Cleanup
• D-64 - Non-specialized
• D-65 - Weatherization and Energy Conservation

Qualifying Individuals

A ‘qualifying individual’ is a person listed on the CSLB records that satisfies the experience and exam requirements for a license, and is required for every license classification issued by the CSLB. While a business may only have one license, it may contain multiple classifications within that license, with at least four (4) years of experience are shown for each classification by a properly qualified individual.

Per the contractor’s state law, a qualifying individual is responsible for any operations undertaken by the licensee, and must supervise and control any construction operations performed by the licensee.  Any illegal activity performed by a licensee will reflect on the qualifying individual and affect their position.

The term licensee refers to the business or company holding a contractor’s license.  The types of qualifying individuals allowed for each type of licensee are:

• Individual – Owner or Responsible Managing Employee (RME)
• Partnership – Qualifying Partner or RME
• Corporation – Responsible Managing Officer (RMO) or RME
• LLC – RME, RMO, responsible manager or responsible managing member

If a qualifying individual leaves a company, the business has 90 days to replace the qualifying individual.

Responsible Managing Employee (RME)

A Responsible Managing Employee (RME) is a licensee’s full-time employee, working at least 32 hours per week, or is present during 80% of the operating business time, whichever is less.  An RME is also the licensee’s permanent employee with the required work experience, having passed the examination.  As an RME, the employee may qualify for a license but does not necessarily own a part of the business being licensed.

Responsible Managing Officer (RMO)

A Responsible Managing Officer (RMO) is an officer of the business or corporation, such as a President, Vice-President, Secretary, or Treasurer.  To qualify as an RMO, an individual must demonstrate required work experience and pass the examination.

In both cases, the license is not issued to a qualifying individual, but rather to the business itself. If the qualifying individual leaves a licensed business, the license remains with the business.

Qualifying Individual Restrictions

A person may act as a qualifying individual for more than one active license, if one of the following conditions exists:

• There is a common ownership of at least 20% of the equity of each firm for which the person acts as a qualifier; or
• The additional firm is a subsidiary of, or a joint venture, with the first; or
• The majority of the partners or officers are the same.

Even if the individual meets the above conditions, a person may serve as the qualifying individual for no more than three (3) firms in any one year. If a qualified individual separates from a third firm, they must wait one year before associating with a new third firm. In most cases, an RME can act as a qualifying individual for only one active license at a time.

Basic Licensing Requirements

Basic Requirements to Become a California Licensed Contractor

All qualifying individuals must be at least 18 years of age, and be able to effectively manage the daily activities of a construction business.  Similarly, a qualifying individual must have at least four (4) full years of experience within the last ten years as a journeyman, foreman or supervisor, in the applied classification. An apprenticeship, college education, or training can account for no more than three (3) years of the required experience.

Who Must Be Licensed?

Any business or individual constructing or altering a building, road, highway, railroad, parking facility, excavation, or any other structures in the state of California that exceeds $500 in labor and materials must be licensed by the California CSLB.

Who is Exempt from Contractor Licensing?

In some cases, businesses are exempt from the licensing requirement.  The following list includes individuals and businesses that are exempt:

• A project for which the combined value of labor, materials, and all other costs on one or more contracts is less than $500. Work on a larger project may not be broken down to smaller amounts less than $500 in an attempt to meet the exemption.
• An employee paid wages, who does not usually work in an independently established business, and does not direct or control the work or project.
• Public personnel working on public projects.
• Officers of the court acting within the scope of their office.
• Public utilities working under specified conditions.
• Oil and gas operations performed by an owner or lessee.
• Owner-builders who build or improve existing structures on their own property by performing the work themselves or using their own employees (paid in wages).
  • An owner-builder who owns the property and acts as their own general contractor on the job, either does the work themselves or has employees (or subcontractors) working on the project.
  • The work site must be their principal place of residence occupied for twelve (12) months prior to completion of the work.
  • The homeowner cannot construct and sell more than two structures within a three-year period.
• Sale or installation of finished products that do not become a fixed part of the structure.
• A seller of installed carpets holding a retail furniture dealer’s license but then contracts carpet installation with a licensed carpet installer.
• Security alarm company operators (licensed by the Bureau of Security and Investigative Services) that install, maintain, monitor, sell, alter, or service alarm systems (fire alarm company operators must be licensed by CSLB).
• Persons that only install satellite antenna systems on residential structures or property. These persons must be registered with the Bureau of Electronic and Appliance Repair.

Background Check

Requirements of Background Checking

All contractor license applicants, officers, partners, owners and responsible managing employees (as well as home improvement salesperson applicants) are required to submit a full set of fingerprints for criminal background check.  If an applicant has a criminal background related to the construction industry, then CSLB may reject the application.  If the CSLB denies the application, the applicant may request a hearing to appeal the decision within 60 days of the date of the denial.

The Examination

Once a contractor has submitted the complete application demonstrating sufficient work experience, the CSLB will provide a Notice to Schedule an Examination.  The examination process is composed of two parts:  a law and business segment and trade specific examination.

Note: Limited Specialty Classification (C-61) do not require a trade examination.

After passing both portions of the examination, the contractor must pay the remaining fees and complete the required paperwork to receive their license.

If the applicant fails one or both sections, or if the applicant fails to appear for the examination, rescheduling must be made within 90 days, as well as paying an additional rescheduling fee, otherwise the application is void.  The CSLB will grant extensions up to 90 days if the applicant has medical documentation stating the reason for their non-appearance, or if other circumstances beyond the control of the applicant are applicable.

There is an 18 month period in which an applicant can pass the exam.  If the applicant does not pass within this time, then the application will be void and the applicant must reapply.

Examination Waiver

The examination may be waived entirely at the Registrar’s discretion, for the following reasons:

• The applicant has passed both qualifying examinations within the past five (5) years.
• The applicant has served as the qualifying individual for another license in good standing in the same classification within the past five (5) years.
• The applicant is an immediate family member of a licensee, whose license was active and in good standing for five (5) of the previous seven (7) years.
• Following the death or absence of a family member: The applicant has been engaged in the licensee’s business for five (5) of the previous seven (7) years and is applying for the same classification.
• Reciprocity: The registrar receives written notification that the applicant is licensed as a contractor in another state under a similar classification. That state must have similar or greater professional qualifications as California.

Note: Those eligible for an examination waiver must still satisfy the experience requirements of the application: a minimum of five years of journey-level experience in the business, verified by a qualified person such as an employer, contractor, or other journeyman. Other waiver provisions defined in Business and Professions Code sections 7065.1, 7065.2, and 7065.3 may also be granted.

Maintaining a License

The following requirements are required to maintain a contractor’s license:

• A licensee must post the necessary bonds, cash deposits or appropriate license fee.
• When a license is issued, the licensee will receive a pocket license and a wall certificate. A contractor must carry the pocket license at all times when acting as a contractor. Similarly, the wall certificate must be displayed at the licensee’s main place of business at all times.
• Include their license number on all advertising (see “Advertising” later in this chapter).
• A license must be renewed before the expiration date, otherwise, the contractor will be considered unlicensed.

Renewal

A license will always show the business name, license classification, type of business, issuance date, and the expiration date.  Licenses expire 2 years from the end of the license’s issuing month.  The renewal form must be completed and returned to the Registrar with the necessary fee before the expiration date.

If a license is not renewed on time, and the licensee shows signs of negligence, then, the applicant may send a written petition to the Registrar for a retroactive renewal of the license within 90 days of the expiration date.  If the Registrar grants the petition, then the licensee can avoid operating in an unlicensed period, effectively extending the upcoming regular expiration date.

If renewal does not occur within 90 days of the expiration date, then a licensee may renew their license within 5 years following the most recent expiration date, by completing a renewal form and paying the necessary fee.  This fee may include a penalty in addition to the regular fee.

If this renewal does not take place within a five (5) year time period, the license will be considered void.  In this case, the licensee must file a new application and retake all of the required examinations to receive another license.

Changes to a License

A license issued to an individual or specified licensee cannot be transferred or sold.  However, certain changes may affect the status of a license.  A license may be canceled if any of the following occurs:

• Individual license – if an owner dies;
• Partnership license – if a general or qualifying partner dies or separates from the business;
• Corporation license – if there is notification by the licensee of merger, dissolution, or surrender of the right to do business in California;
• Joint venture license – if cancellation, revocation, or withdrawal occurs to any of the businesses forming the joint venture.

If the death of a licensee occurs, their license will be canceled unless a member of their immediate family applies within 90 days of the death for a license continuation.  If the Registrar grants continuation, then the applying family member may continue the previous licensee’s contracting business for the period for which the continuance is granted (up to one (1) year).  Once this period expires, the family member must obtain their own license to continue business operations.

If a member of a partnership business dies or leaves the business, or if a new partner is added, the license will be cancelled.  The remaining partners may request continuation from the Registrar within 90 days of the absence of a partner.  If the Registrar agrees to the continuation, the remaining partners may continue the contracting business during the period for which the continuance is granted (up to one (1) year). To continue the business, the current partners must obtain a new license within 90 days of any change.  A qualifying individual, original to the business, may qualify for a new license without retaking the exam.

If a licensee loses their qualifying individual, the qualifying individual must be replaced within a 90-day period by another qualifying individual.  This individual must pass the examination within the period to keep the license in effect, unless the individual meets the waiver requirement.

If a license is surrendered voluntarily at any time by a licensee, the Registrar must order the license canceled and no fee will be returned to the licensee. If a business owned by a licensee has its name or address changed, the Registrar must be notified within 90 days.

A licensee that has changed the business style must apply for a new license reflecting this change.  Subsequently, two different licenses will be in effect and the licensee may choose to keep both if the qualifying licensee owns a minimum of 20% of both businesses.  A sole proprietorship licensee applying for a corporation license can transfer their existing license number to a corporation.  The licensee can request that the license number remain for the corporation if they own a minimum of 51% of the corporation.  In this case, the sole proprietorship license will subsequently become void and the corporation will now have the existing license number.

Inactive License

A license can be activated or deactivated by a licensee at any time.  When the license is inactive, the licensee is not required to maintain a bond or insurance during this period, but must renew the license every 4 years, as opposed to every 2 years for an active license.  To deactivate the license, the licensee must submit to the Registrar a form requesting the license to become inactive.  If the license is inactive, then the licensee may not perform any contracting operations.  To reactivate the license, another form must be submitted along with a reactivation fee and the necessary bond.  Fees for reactivation are the same as fees for active renewal.

Advertising

Licensed contractor advertising encompasses much more than newspaper, magazine, radio or television advertising. Advertising includes:

• A contractor’s business card;
• Any contract proposal;
• Lettering appearing on company trucks and other vehicles;
• Any sign or billboard identifying the contractor company;
• Any electronic transmission, including a company’s website content;
• Any soliciting brochure, pamphlet, circular, or Internet that is posted or distributed;
• Any clothing or giveaway items that include a company name or logo;
• Any directory or listing that states or implies a contractor is seeking work that requires a contractor license under California Contractors License Law.

Contractors must include their license number on all forms of advertising.  Failure to include the license number can result in a civil penalty between $100 and $1,000 for a first offense.

Identifying Business Vehicles

C-36 Plumbing, C-45 Sign, and C-57 Well-Drilling contractors must display the following information on every side of a commercially registered business vehicle in letters at least 1½ inches high:

• Business name;
• Permanent business address;
• Contractor license number.

All other licensed contractors must display their business names and contractor license numbers on their commercially-registered vehicles.  The name and number must be clearly visible, in letters at least ¾ inches high and wide.

Advertising Beyond the Scope of the License

Contractors are prohibited from advertising for construction work outside of their licensing classification.  For example, a C-29 Masonry contractor advertising to perform electrical work can be charged with a misdemeanor - unless that contractor also holds a C-10 Electrical contractor license.

Note: An exception to this provision permits licensed “A” General Engineering and “B” General Building contractors to advertise as “general contractors”.

The civil penalty for an advertising violation ranges from $700 to $1,000, plus any other punishment established by the Registrar or court.

Unlicensed Operators

Like legitimate contractors, unlicensed operators sometimes use advertising to obtain new clients.  Advertisements without license numbers, or with numbers that are not issued by CSLB, are frequently used as CSLB sting targets.  An unlicensed contractor may not advertise their business.

Asbestos Removal Contractors

In addition to complying with all other relevant advertising guidelines, ads soliciting the removal of asbestos from buildings or structures must include the registered licensee name, as well as two distinct numbers:

• The asbestos certification number issued by CSLB;
• The registration number required under Labor Code Section 6501.5 for anyone performing asbestos removal work.

Failure to include these numbers will result in a Notice to Comply demand from the Registrar.  Failure to comply with this notice, or advertising to remove asbestos without the proper certification and registration will result in a citation and potential civil penalty ranging from $100 to $1,500.

Unlicensed Activity

A business found contracting without a license is usually considered an offending business. The business is liable for the following penalties:

• First offense: The individual or business may receive a citation from the Registrar and face a potential jail sentence of up to 6 months and/or a fine of up to $5,000. This is accompanied by a civil penalty of $200 to $15,000. This penalty may be lessened or waived by the Registrar in certain cases, if a contractor obtains a license within a prescribed period. Regardless, offensive charges can still be filed against individuals contracting without licenses for projects covered by a state of emergency or disaster proclaimed by the governor or President of the United States.
• Second offense: The individual or business found guilty of a criminal offense that is liable for punishment of a civil penalty of 20% of the contract price or $5,000, whichever is greater, and/or imprisonment in the county jail for at least 90 days.

If a licensed contractor contracts with unlicensed persons, or allows any unlicensed persons to use their license, the contractor is subject to a citation from the Registrar and a civil penalty of up to $15,000.  Deliberate fraudulent use of a contractor’s license number carries with it a maximum fine of $10,000 and a possible one-year imprisonment.

Statewide Investigative Fraud Teams (SWIFT)

In addition to the complaint process, the CSLB created the Statewide Investigative Fraud Team (SWIFT) to focus on underground and unlicensed contractors making money at the expense of legal clients and businesses.  This unit possesses the authority to visit any construction site under process without reason or complaint, and is permitted to ask contractors to produce their required licenses.  Those contractors failing to provide valid copies of their licenses will be cited.

Disciplinary Guidelines

If a licensee commits any violation of the Contractor’s License Law, then the Registrar has the authority to act against this licensee.  Possible violations are:

• Committing a willful act of fraud resulting in significant damage to others;
• Deliberately violating California labor, safety, building or compensation insurance laws;
• Withholding money for materials or services related to the licensee’s actions;
• Conviction of a felony pertaining to the licensee’s contracting operations;
• Failure to maintain records of all contracts, construction projects, receipts and disbursements for all transactions for at least five (5) years;
• Working as a contractor after license deactivation by the Registrar;
• Employing or associating with a contractor whose license has already been denied, suspended, or revoked;
• Allowing a contractor’s license to be used by unlicensed individuals;
• Aiding or contracting with unlicensed individuals with the intent to evade provisions established by the Contractor’s License Law;
• Using bankruptcy as a legal loophole to avoid the settling of any obligation or debt;
• Abandoning any type of construction work without lawful reason;
• Inability to complete a project within the contracted price;
• Inability to pay subcontractors for their work or services within ten (10) days following receipt of a payment, unless otherwise agreed to, in writing;
• A home improvement contractor employing an unregistered salesperson;
• Offering rebates (“under the table” money) for obtaining a construction project.

If any of these violations are committed by a contractor, or the Registrar finds other committed actions to be violations, then the Registrar has the right to impose any disciplinary action against the contractor’s license and other licenses if held.  Disciplinary actions can consist of:

• The Registrar may issue a citation against a contractor’s license. This citation describes the nature of the violation of the Contractor’s License Law, the timeframe in which the violation may be corrected, and the civil penalty amount not to exceed $15,000, if applicable. To remove a citation, a contractor must comply with any terms stated before the deadline. To appeal a citation, a contractor must submit an appeal request within fifteen (15) working days from the receipt of citation.
• A license may be revoked due to a violation. The license will not be reinstated or reissued for one to five years from the effective date of the decision.
• A license may be suspended. Contractors cannot undertake any projects until the license has been reinstated. To reinstate the license, the contractor must fulfill all of the reinstatement conditions.

If the Registrar believes a licensed contractor has committed a violation which may potentially lead to substantial injury of other individuals, the Registrar may apply (through the state’s Attorney General or the county district attorney) for an injunction to the superior court of the county where the contractor resides or conducts business.  If the contractor is unlicensed, the Registrar may apply for an injunction, even if no injuries have occurred.

Note: An injunction is a judicial order restraining a person or company from beginning or continuing an action which threatens or invades the legal rights of another, or that compels a person to carry out a certain act, e.g., to make restitution to an injured party.

Business License

In California, businesses need a general California city business license in order to operate.  Whether a business is small or large, home based or online, all businesses must obtain a business license from their respective city or county, if the business is operated in an unincorporated area (a small town county run or village). If the business has branches in multiple cities, business licenses must be obtained for all locations.

The Contractors State License Board (CSLB)

The CSLB was created to provide an essential licensing and regulatory body for the California construction industry, introducing stability and preventing the industry from falling into disorder.  The CSLB is currently an integral part of the Department of Consumer Affairs.

The appointment of the Registrar of Contractor comes under the authority of a 15-member board consisting of ten (10) public members and five (5) contractors.  Eleven (11) appointments fall under the governor’s purview, while the remaining four (4) are within the powers of the legislature.  The Registrar is responsible for directing administrative policies that oversee the board’s operation.  The Board arranges regular scheduled public meetings throughout the state for the general public to address agenda items and other issues.

The activities of the field offices fall under the jurisdiction of the headquarters’ responsibilities, including the initiation of all disciplinary actions resulting from investigations.  Field offices carry out investigations on behalf of consumer complaints against contractors, while the Statewide Investigative Fraud Team (SWIFT) monitors unlicensed activities.

Consumer’s rights are duly protected by the CSLB through policies promoting the health, safety, and general welfare of the public in regards to construction.  The CSLB is attempting to achieve the following goals through its supervision of the construction industry:

• Ensuring the supervision of construction activities, and that these activities are conducted in a safe, competent, professional manner.
• Licensing contractors and the enforcement of licensing laws.
• The enforcement of regulations and other standards governing construction contracting in an even and equitable manner.
• Resolve disputes arising from construction activities.
• Aiding consumers to make informed decisions through proper education.

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