Changes to Contractor Licensing Laws for 2018
The last legislative session in South Carolina saw a change in South Carolina’s contractor licensing laws. South Carolina has five different general contractor licensing groups. Each license group is determinative of the dollar value of work that a general contractor could perform and each with its own net worth requirement ranging from $10,000 to $250,000. South Carolina also has had five different mechanical contractor licensing groups. Each license group is determinative of the dollar value of work that a mechanical contractor could perform and each with its own net worth requirement ranging from $3,500 to $200,000.
Upon application for a new license or renewal of an existing license, the general or mechanical contractor would have to provide financial statements to establish that the net worth of the company met the net worth requirements of the particular license group.
While the South Carolina Department of Labor, Licensing and Regulation (“LLR”) had the statutory authority to consider deviations from the standard accountant’s report; notes to financial statements; additional financial information submitted by the applicant; and, on an original application, the net worth of the company’s principals in determining a company’s net worth, as a practical matter, LLR was never comfortable in doing so. As a result, either a company met the statutory net worth requirements, or it did not.
Employee Stock Ownership Plans (“ESOP”) have become increasingly popular as a succession planning tool, particularly in the construction industry. Many financial planners tout ESOPs as a “win-win” for employees and management. One downside is that until the stock is paid for it is carried as a debt on the books of the company under generally accepted accounting practices (GAAP) which results in an artificially negative financial statement.
More than 25 states have legislation which allow the licensing agency to issue a license for an ESOP-owned company but until recently South Carolina did not. The recently-passed bill, HB-4612, is modeled after similar legislation in North Carolina. HB-4612 allows a general or mechanical contractor to post a surety bond with LLR “in an amount two times the net worth requirement for the applicant’s license group with his initial or renewal application” in lieu of providing a financial statement showing the required net worth.
In other words, general contractors in license group five have been required to show a net worth of $250,000 may now post a surety license bond in the amount of $500,000.
The downside is that claims may be filed against the license bond for the benefit of “any person who is damaged by an act or omission of the [contractor] constituting a breach of construction contract or contract for the furnishing of labor, materials or professional services for construction undertaken by the [contractor], or by any unlawful act or omission of the [contractor] in performing construction.”