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Section 1 of 7 · about 13% of the exam

Business Organization and Licensing

Official subtopics: Company organization, Licensing requirements, Advertising and subcontracting.

Business Organization and Licensing is about 13% of the CSLB Law and Business exam. The CSLB study guide lists three subtopics: company organization, licensing requirements, and advertising and subcontracting. This note explains who needs a license, how a license is organized around a "qualifier", and the basic rules for bonds, changes, and advertising.

Who needs a contractor license

  • The minor work exception is now under $1,000. The licensing law does not apply to a project where the total price for labor, materials, and all other items is less than $1,000, and the work does not need a building permit. (Bus. & Prof. Code §7048)
  • The exception has limits. It does not apply if the work is part of a larger operation, or if a job is split into contracts under $1,000 to avoid the law. It also does not apply to a person who advertises as a contractor or who employs someone to help do the work. (Bus. & Prof. Code §7048)
  • Older guides say $500. CSLB's Get Licensed to Build guide (dated 2023) still says $500. The current statute says $1,000, and the statute controls. (Bus. & Prof. Code §7048)
  • License before you bid. Contractors, including subcontractors, specialty contractors, and home improvement contractors, must be licensed before submitting bids. (CSLB: Get Licensed to Build)

Penalties for contracting without a license

  • Crime. Acting as a contractor without a license is a misdemeanor. A first conviction can bring a fine of up to $5,000, up to six months in county jail, or both. (Bus. & Prof. Code §7028)
  • No lawsuit to collect payment. A contractor cannot sue to collect payment for work that needs a license unless the contractor was licensed at all times during the work. (Bus. & Prof. Code §7031)
  • The customer can get money back. A person who used an unlicensed contractor can sue to recover all the money paid to that contractor. (Bus. & Prof. Code §7031)

Business types

CSLB issues licenses to five types of business: sole owner, partnership, corporation, joint venture, and limited liability company (LLC). (CSLB: Get Licensed to Build)

The qualifier

  • Every license needs a qualifier. The qualifier is the person in CSLB records who meets the experience and exam requirements. A qualifier is required for every classification on a license. (CSLB: Get Licensed to Build)
  • Experience. The qualifier must be at least 18 and have at least four years of journey-level experience in the last 10 years, in the classification applied for. (CSLB: Get Licensed to Build)
  • Duties. The qualifier is responsible for supervision and control of the company's construction operations, so that the company follows the licensing law. (Bus. & Prof. Code §7068.1)
  • Who can qualify each business type (CSLB: Get Licensed to Build):
    • sole owner: the owner or a responsible managing employee (RME);
    • partnership: a general partner (the "qualifying partner") or an RME;
    • corporation: an officer listed with CSLB (the responsible managing officer, or RMO) or an RME;
    • LLC: a responsible managing member, responsible managing manager, RMO, or RME.
  • RME rules. An RME must be a real, permanent employee who works in the business at least 32 hours a week or 80% of the business's operating hours, whichever is less. An RME cannot be the qualifier on any other active license. (CSLB: Get Licensed to Build)
  • Qualifying more than one license. A person can qualify an additional firm only if the firms share at least 20% common ownership, the additional firm is a subsidiary of or a joint venture with the first, or the firms have mostly the same partners, officers, or managers. Even then, a person can qualify no more than three firms in any one-year period. (Bus. & Prof. Code §7068.1)

Classifications

  • Class A, General Engineering: work on fixed works that need specialized engineering knowledge and skill.
  • Class B, General Building: work on structures that need at least two unrelated building trades or crafts.
  • Class B-2, Residential Remodeling: nonstructural projects on existing residential wood frame structures that need at least three unrelated building trades or crafts.
  • Class C, Specialty: work that needs special skill in a specialized building trade or craft.

Source: CSLB: Get Licensed to Build.

Bonds, license status, and changes

  • Contractor's bond. A licensee must have a $25,000 contractor's bond on file to get, renew, reactivate, or keep a license. No bond is needed while the license is inactive. (Bus. & Prof. Code §7071.6)
  • Bond of qualifying individual. A separate $25,000 bond is required for an RME, and for an RMO who owns less than 10% of the voting stock or equity of the company. (CSLB: Get Licensed to Build)
  • LLC licenses also need a $100,000 bond for workers and liability insurance. (CSLB: Get Licensed to Build)
  • Active and inactive. Only an active license can bid or contract for work. A license is first issued for two years. After that, active licenses renew every two years and inactive licenses every four years. (CSLB: Get Licensed to Build)
  • Report changes within 90 days. Licensees must tell the registrar in writing within 90 days about any change to their license information, such as business address, personnel, or business name. Late notice is grounds for discipline. (Bus. & Prof. Code §7083)

Advertising

  • Advertise only what you are licensed for. It is a misdemeanor to advertise construction work unless you hold a valid license in the classification you advertise. A licensed building or engineering contractor may advertise as a general contractor. The fine is $700 to $1,000. (Bus. & Prof. Code §7027.1)
  • "Advertising" is broad. It includes business cards, signs, newspapers, radio and TV, electronic messages, and directory listings. (Bus. & Prof. Code §7027.1)
  • Show your license number. A licensee must put the license number on all construction contracts, subcontracts and calls for bid, and all forms of advertising. (Bus. & Prof. Code §7030.5)

Sources