The Idaho Contractors Registration Act (ICRA) was passed by the Idaho Legislature in 2005. Under that law, it is unlawful “for any person to engage in the business of, or hold himself out as, a contractor within this state without being registered,” as of Jan. 1, 2006. I.C. § 54-5204(1).
The law also provides that it is unlawful for a contractor to engage any other contractor who is required by the ICRA to be registered but is not. I.C. § 54-5204(2). Section 54-5203 defines a contractor as any person who, in any capacity, offers to perform construction, or purports to have the capacity to do so, or submits a bid to perform construction, whether directly or through others. A construction manager who performs construction management services is also considered a “contractor” for purposes of the registration law.
The legislature passed the ICRA in response to the rise of consumer complaints about fly-by-night contractors who were attempting to cash in on the construction boom at the time. (The good ol’ days, right?) Unlike many “feel good” laws that legislatures pass from time to time to quell a public outcry, the ICRA has some real teeth to it in terms of consequences for failure to register, as Stonebrook Construction, LLC of Idaho Falls recently found out.
Stonebrook was founded by Tyler Schwendiman and Brandon Burton in 2006. Initially the owners were conducting business as a general partnership under the assumed business name of Stonebrook Construction. About that same time, Schwendiman registered as a contractor. In 2007, the business partners filed Articles of Organization with the Idaho Secretary of State’s Office to create a limited liability company for conducting their construction business; however, they never registered the LLC as a “contractor,” believing that Schwendiman’s previous registration sufficed.
Between late 2007 and mid-2008, Stonebrook furnished materials and labor toward the building of a home for Joshua and Katrina Ashby. The Ashbys secured a loan for their home construction through Chase Home Finance, LLC and executed a Deed of Trust in favor of the lender as security for repayment of the loan. You guessed it – the Ashbys ultimately failed to pay Stonebrook, and the construction company filed a claim of lien against the property and proceeded to foreclose against the property to recover what it was owed. Chase filed a motion to dismiss Stonebrook’s case, however, citing Section 54-5208 of the ICRA which provides that a contractor that fails to register “shall be deemed to have conclusively waived any right to place a lien upon real property.”
Stonebrook argued to the Idaho Supreme Court that, because Schwendiman registered as an individual and was a 50 percent owner of Stonebrook, that such registration satisfied the ICRA. Stonebrook’s argument was apparently based on a “unity of interest” theory that the owners of an LLC and the LLC are one and the same. The Idaho Supreme Court rejected that theory, noting that a strict reading of the ICRA does not allow for such a construction of the law.
Although the Court did not go so far as to state this, while Stonebrook’s legal theory was certainly a novel attempt to shoehorn its unfortunate facts into the statutory scheme, such a theory flies in the face of the rationale behind the concept of limited liability companies.
The purpose of a limited liability company (or, a corporation) is to create a separate and distinct legal being apart from its owners. That separate legal identity is what affords business owners the right to shield their personal assets from the debts of the business (assuming they dot all of the appropriate i’s and cross all of the appropriate t’s). Too often, however, business owners lose sight of this separate identity distinction in the rush of day-to-day business and proceed, in thought and in action, as if they are the alter ego of their business.
Bottom line: Always treat your LLC or corporation as the “individual” that it is and, if you’re in the construction business, whether you’re a two-bit handyman or a full-fledged construction company with big aspirations, make sure you (and all of your subcontractors) are in compliance with the ICRA.
Molly O’Leary represents business and telecommunications clients throughout Idaho, and is a managing member of Richardson & O’Leary, PLLC, in Boise (www.richardsonandoleary.com). In addition, Ms. O’Leary serves as a commissioner on the Idaho State Bar Board of Commissioners, and on the statewide advisory council for the Idaho Small Business Development Center. You can follow her on Twitter: @BizCounselor.