By: Jason Murai, Esq.,
Businesses and individuals in the construction industry require a license when engaging in projects where the total cost in labor and materials is $500 or more. Licenses may be issued to a business entity if the business employs a licensed individual to qualify for the license. (Bus. & Prof. Code § 7065(b).) For corporations, the qualifying individual is known as either the responsible managing employee (“RME”) or, if an officer, the responsible managing officer (“RMO”). (Bus. & Prof. Code § 7065(c)(3).)
An RME must be a bona fide employee of the corporation, meaning an employee who is permanently employed by the corporation and is actively engaged in the operation of the corporation’s contracting business for at least 32 hours or 80% of the total hours per week such business is in operation. (Contractor State License Board, Rules & Regulations, Chapter 13, Article 2, § 823(a).)
In contrast, an RMO is responsible for exercising direct supervision and control of construction operations to secure compliance with applicable law. (Bus. & Prof. Code §§ 7068(b)(3), 7068.1(a).) “Direct supervision and control” includes any one or any combination of the following activities: supervising construction, managing construction activities by making technical and administrative decisions, checking jobs for proper workmanship, or direct supervision on construction job sites. (Contractor State License Board, Rules & Regulations, Chapter 13, Article 2, § 823(b).)
An RMO cannot act as qualifying person for an additional individual or firm unless one of the following conditions exists:
- The RMO has at least 20% common equity ownership in each individual or firm;
- The additional firm is a subsidiary of or a joint venture with the first. “Subsidiary” means any firm at least 20 percent of the equity of which is owned by the other firm;
- The majority of the partners, officers, or managers of the firms are the same.
(Bus. & Prof. Code § 7068.1(a).)
Moreover, an RMO can only act as RMO for no more than three firms in any one-year period. (Bus. & Prof. Code § 7068.1(b).) However, an RMO’s own sole proprietorship will not count towards the three-firm limit.
An RMO can merely be an officer with no ownership stake, but an RMO that owns less than 10% of the firm must post a “Bond of Qualifying Individual”. (Bus. & Prof. Code § 7071.9.) If the RMO has less than 20% ownership, the RMO is restricted to being the RMO to just the one corporation.
Licensed individuals must be wary about serving as RMO for a corporate license without any direct involvement in the day to day operation of the business. This practice of “renting” a licensed individual as RMO may result in disciplinary action by the CSLB against the licensee, including revocation of a license and misdemeanor criminal charges, which can result in imprisonment of up to six months and a fine of up to $5,000. (Bus. & Prof. Code § 7068.1(e).) It can also result in personal liability for negligence if a construction project goes wrong.
If you have questions about forming a construction corporation with an RMO or RME, confirm all licensing requirements with the CSLB https://www.cslb.ca.gov/ and contact an attorney experienced in this area. This can be particularly important if you have plans to form a construction company with an RMO as a minority shareholder then get your own license later. A corporate attorney can assist you with structuring a shareholder agreement so that you can buy out the RMO’s interest in the company later when you no longer need them as a supervising licensee, and so that the RMO cannot leave without adequate notice before the company has another licensee.
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