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Section 1 of 7

CSLB Company Organization Practice Questions

10 free practice questions on company organization, part of the Business Organization and Licensing section (about 13% of the exam). Try each one, then open the answer: every choice is explained and the law is quoted.

Questions and answers

  1. Business Organization and Licensing

    1. Three friends form a limited liability company (LLC) to do construction work. Under section 7065, can CSLB issue a contractor license to the LLC itself?

    • A. Yes, because an LLC is a business type that can be licensed
    • B. No, because only each member can hold a license, not the LLC
    • C. No, because only individual owners and corporations are licensed
    • D. Yes, but only if the LLC changes into a general partnership
    Show answer

    Correct answer: A

    • A. Yes, because an LLC is a business type that can be licensed

      Correct answer

      Section 7065 says licenses are issued to individual owners, partnerships, corporations, limited liability companies, and participating tribes. So an LLC can hold a license in its own name.

    • B. No, because only each member can hold a license, not the LLC

      The LLC itself can be licensed under section 7065. The members do not need separate licenses for the LLC to be licensed.

    • C. No, because only individual owners and corporations are licensed

      Section 7065 lists more than individual owners and corporations. It also lists partnerships, limited liability companies, and participating tribes.

    • D. Yes, but only if the LLC changes into a general partnership

      The LLC does not need to change into another business type. Limited liability companies are already listed in section 7065.

    Explanation

    Section 7065 says contractor licenses are issued to individual owners, partnerships, corporations, limited liability companies, and participating tribes. So an LLC can hold a license in its own name. The members do not need separate licenses for the LLC to be licensed, and the LLC does not need to change into another business type.

    Source

  2. Business Organization and Licensing

    2. A joint venture holds an active license. One of its member companies has its own license suspended for a short time. Under section 7029, what happens to the joint venture license?

    • A. Nothing, as long as one member still holds a license
    • B. It stays active for 90 days while the member fixes it
    • C. It is cancelled and the joint venture must reapply
    • D. It is suspended automatically while that license is not active
    Show answer

    Correct answer: D

    • A. Nothing, as long as one member still holds a license

      The joint venture license is suspended if any member lacks a current, active license in good standing, even if another member is still licensed.

    • B. It stays active for 90 days while the member fixes it

      The law gives no 90-day grace period; the suspension is automatic while the member's license is not active.

    • C. It is cancelled and the joint venture must reapply

      The law does not say the license is cancelled; it is automatically suspended for the period the member's license is not active.

    • D. It is suspended automatically while that license is not active

      Correct answer

      Correct: an active joint venture license is automatically suspended by operation of law during any period a member lacks a current, active license in good standing.

    Explanation

    Section 7029 says an active joint venture license is automatically suspended by operation of law during any period in which any member does not hold a current, active license in good standing. Here the member's license is suspended, so the joint venture license is suspended for that same period. The law does not give a 90-day grace period, and it does not say the joint venture license is cancelled.

    Source

  3. Business Organization and Licensing

    3. A licensed contractor moves to a new business address. It sends CSLB written notice five months after the move. Under section 7083, when does the address change take effect in CSLB's records?

    • A. On the date the contractor actually moved
    • B. On the date CSLB headquarters gets the notice
    • C. On the date 90 days after the contractor moved
    • D. On the next renewal date of the contractor's license
    Show answer

    Correct answer: B

    • A. On the date the contractor actually moved

      Because the notice came more than 90 days after the move, section 7083 does not use the move date. The change takes effect on the date the written notice is received at CSLB headquarters.

    • B. On the date CSLB headquarters gets the notice

      Correct answer

      Correct. The contractor missed the 90-day notice deadline, so under section 7083 the change takes effect on the date the written notice is received at the board's headquarters office.

    • C. On the date 90 days after the contractor moved

      In section 7083, 90 days is the deadline to notify the registrar, not the date the change takes effect. Because the notice was late, the change takes effect when CSLB headquarters receives it.

    • D. On the next renewal date of the contractor's license

      Section 7083 does not tie the change to the license renewal date. A late notice makes the change effective on the date CSLB headquarters receives the written notice.

    Explanation

    Section 7083 says licensees must notify the registrar in writing within 90 days of any change to their recorded information, including business address, personnel, and business name. If the licensee is late, the change takes effect on the date the written notice is received at the board's headquarters office. Five months is more than 90 days, so the change takes effect when CSLB receives the notice. Being late is also grounds for disciplinary action.

    Source

  4. Business Organization and Licensing

    4. A licensed limited partnership has one general partner and only one limited partner. The limited partner dies. Under section 7076, what happens to the partnership license?

    • A. Nothing, because the death of a limited partner never affects it
    • B. It is suspended until the estate sells the partner's share
    • C. It is canceled unless a new limited partner is added in 90 days
    • D. It is canceled right away, and nothing can be done to keep it
    Show answer

    Correct answer: C

    • A. Nothing, because the death of a limited partner never affects it

      The death of a limited partner does affect the license when the partnership has only one limited partner, as this one does.

    • B. It is suspended until the estate sells the partner's share

      Section 7076 does not suspend the license until a share is sold. The license is canceled upon the death unless a new limited partner is added within 90 days.

    • C. It is canceled unless a new limited partner is added in 90 days

      Correct answer

      Because this partnership license has only one limited partner, the license is canceled upon that partner's death unless a new limited partner is added within 90 days of the death.

    • D. It is canceled right away, and nothing can be done to keep it

      The license can be kept if a new limited partner is added to the license within 90 days of the death, so it is not lost with nothing to be done.

    Explanation

    Section 7076 says the death of a limited partner does not affect the partnership license unless the license has only one limited partner. In that case, the license is canceled upon the death unless a new limited partner is added to the license within 90 days of the death. This partnership had only one limited partner, so it must add a new one within 90 days to keep the license. The general partner must also notify the registrar in writing within 90 days of the death.

    Source

  5. Business Organization and Licensing

    5. A corporation was formed in Arizona, so in California it is called a foreign corporation. It applies for a California contractor license. Under section 7065, must it provide its identification number issued by the Secretary of State?

    • A. No, because only California corporations must provide this number
    • B. Yes, because foreign and domestic corporations must both provide it
    • C. No, because it may provide its Arizona license number instead
    • D. Yes, but only if it plans to bid on California public works
    Show answer

    Correct answer: B

    • A. No, because only California corporations must provide this number

      Wrong. Section 7065 applies to corporations "whether foreign or domestic," so the rule is not limited to California corporations.

    • B. Yes, because foreign and domestic corporations must both provide it

      Correct answer

      Correct. Section 7065 says a corporation or LLC seeking a license, whether foreign or domestic, must provide its Secretary of State identification number. That includes this Arizona corporation.

    • C. No, because it may provide its Arizona license number instead

      Wrong. A license number from another state does not replace the identification number issued by the Secretary of State.

    • D. Yes, but only if it plans to bid on California public works

      Wrong. Section 7065 does not limit this rule to public works. Any corporation seeking a license must provide the number.

    Explanation

    Business and Professions Code section 7065 says a corporation or LLC seeking a license, whether foreign or domestic, must provide its identification number issued by the Secretary of State. A foreign corporation is one formed in another state, and a domestic one is formed in California. So the rule covers this Arizona corporation too. The law does not limit the rule to California corporations or to public works, and a license number from another state does not replace this number.

    Source

  6. Business Organization and Licensing

    6. A licensed partnership has two general partners. One of them dies. The other partner asks for and gets a continuance (temporary extension) of the license. Under section 7076, what work may he do under the continuance?

    • A. Only projects that were already in progress at the death
    • B. No work at all until a new general partner is added
    • C. Projects in progress and new work, for a reasonable time
    • D. Only public works projects that were bid before the death
    Show answer

    Correct answer: C

    • A. Only projects that were already in progress at the death

      Too narrow. The in-progress-only limit applies when a general partner leaves (disassociates); when one dies, the continuance also covers new work.

    • B. No work at all until a new general partner is added

      The remaining general partner may get a continuance and keep working, so no rule stops all work until a new general partner is added.

    • C. Projects in progress and new work, for a reasonable time

      Correct answer

      Correct. When a general partner dies, the remaining general partner may get a continuance to complete projects in progress and undertake new work for a reasonable time set by board rules.

    • D. Only public works projects that were bid before the death

      No rule limits the continuance to public works; it covers projects in progress and new work for a reasonable time.

    Explanation

    Business and Professions Code section 7076 says a partnership license is canceled when a general partner dies. The remaining general partner may ask for a continuance to complete projects in progress and undertake new work for a reasonable time set by board rules. He must get a new license to keep contracting after the continuance ends. The limit to only projects contracted for or in progress applies when a general partner leaves (disassociates), not when one dies. No rule stops all work or limits him to public works.

    Sources

  7. Business Organization and Licensing

    7. Ben is the responsible managing officer (qualifier) of a licensed corporation. While Ben is away, the corporation does an act that is a cause for disciplinary action. Ben did not know about it. Under section 7122.5, is the act also a cause for disciplinary action against Ben?

    • A. Yes, whether or not he knew of it or took part in it
    • B. No, because he did not know about the act at that time
    • C. No, because only the officer who did the act is responsible
    • D. Yes, but only if he owns 10 percent or more of the stock
    Show answer

    Correct answer: A

    • A. Yes, whether or not he knew of it or took part in it

      Correct answer

      Correct. Section 7122.5 makes the firm's act a cause for discipline against whoever was its qualifier at the time, whether or not he knew of or took part in it.

    • B. No, because he did not know about the act at that time

      Not knowing is no defense for a qualifier. The rule applies whether or not he had knowledge of the act.

    • C. No, because only the officer who did the act is responsible

      The section reaches the qualifier too, not just the officer who did the act. Ben was the qualifier when the act occurred.

    • D. Yes, but only if he owns 10 percent or more of the stock

      Stock ownership matters for the qualifier's bond, not for this rule. The qualifier is covered regardless of how much stock he owns.

    Explanation

    Business and Professions Code section 7122.5 says a firm's act that is a cause for discipline is also a cause for discipline against the person who was its qualifying individual at the time. This applies whether or not the qualifier knew of or took part in the act. Not knowing is therefore no defense for a qualifier. Stock ownership matters for the qualifier's bond, not for this rule.

    Source

  8. Business Organization and Licensing

    8. A contractor is choosing a business structure. According to the SBA, which structure has the strictest internal requirements, such as meetings and records the company keeps for itself?

    • A. A sole proprietorship
    • B. A general partnership
    • C. A limited liability company
    • D. A business corporation
    Show answer

    Correct answer: D

    • A. A sole proprietorship

      The SBA says sole proprietorships have few, if any, internal requirements.

    • B. A general partnership

      The SBA says partnerships have few, if any, internal requirements.

    • C. A limited liability company

      The SBA says LLCs have less strict internal requirements than corporations.

    • D. A business corporation

      Correct answer

      Correct. The SBA says corporations have the strictest internal requirements, such as annual director and shareholder meetings, meeting minutes, bylaws, and stock records.

    Explanation

    The SBA says corporations have the strictest internal requirements. A corporation should hold initial and annual director and shareholder meetings, record minutes, adopt and keep bylaws, issue stock, and record stock transfers. The SBA says LLCs have less strict internal requirements. Other structures, such as sole proprietorships and partnerships, have few, if any.

    Source

  9. Business Organization and Licensing

    9. A corporation applies for a contractor license. Under section 7068, who may serve as its qualifier (the person who meets the experience and exam rules)?

    • A. Any shareholder who owns stock in the corporation
    • B. A responsible managing officer or a responsible managing employee
    • C. A general partner chosen by the board of directors
    • D. An outside accountant or attorney hired by the corporation
    Show answer

    Correct answer: B

    • A. Any shareholder who owns stock in the corporation

      Owning stock alone does not make someone a qualifier. A corporation qualifies through a responsible managing officer or a responsible managing employee.

    • B. A responsible managing officer or a responsible managing employee

      Correct answer

      Section 7068 says a corporation qualifies through a responsible managing officer (RMO) or a responsible managing employee (RME). That person must be qualified in the same license classification.

    • C. A general partner chosen by the board of directors

      A general partner is the qualifier for a partnership, not a corporation. A corporation uses an RMO or an RME.

    • D. An outside accountant or attorney hired by the corporation

      An outside accountant or attorney is not an officer or an employee of the corporation. So that person cannot serve as an RMO or an RME.

    Explanation

    Section 7068 says a corporation qualifies through a responsible managing officer (RMO) or a responsible managing employee (RME) who is qualified in the same license classification. Owning stock alone does not make someone a qualifier. A general partner is the qualifier for a partnership, not a corporation. An outside accountant or attorney is not an officer or an employee of the corporation.

    Source

  10. Business Organization and Licensing

    10. A company wants to use a retired builder as its responsible managing employee (RME). He would sign a short-term agreement and help only when needed. Under section 7068, can he serve as the RME?

    • A. Yes, because his experience is the only thing that matters
    • B. Yes, if he visits each job site at least once a month
    • C. No, because a retired person may never serve as a qualifier
    • D. No, because an RME must be permanently employed by the company
    Show answer

    Correct answer: D

    • A. Yes, because his experience is the only thing that matters

      Experience alone is not enough; an RME must be a bona fide employee, meaning one permanently employed by the applicant.

    • B. Yes, if he visits each job site at least once a month

      Visiting jobs does not fix the problem; an RME must be permanently employed by the applicant and actively engaged in the work.

    • C. No, because a retired person may never serve as a qualifier

      Being retired does not by itself disqualify someone; the problem is that he would not be a permanent employee.

    • D. No, because an RME must be permanently employed by the company

      Correct answer

      Correct: a bona fide employee is one permanently employed by the applicant, and a short-term, as-needed helper does not meet that rule.

    Explanation

    Section 7068 says an RME must be a bona fide (real) employee of the applicant. It defines a bona fide employee as one who is permanently employed by the applicant. An RME must also be actively engaged in the work. A short-term, as-needed helper does not meet this rule, no matter how much experience he has or how often he visits jobs. Being retired does not by itself disqualify someone; the problem is that he would not be a permanent employee.

    Source

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Read the Section 1 study notes: Business Organization and Licensing

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