We have had many conversations with clients who are working to be compliant with new CA AB-5 ruling effective January 1, 2020.
The need to be compliant is imperative and I’m happy to provide my opinion on point C of the ABC test. From reading the AB 5 language and various other trusted resources, being a taxable entity is not the only way to be compliant within AB-5 section C. I do know that if an entity is incorporated the argument for passing C is solid, but I do not believe required. Instead, incorporation is an example of “the usual steps to establish and promote that independent business.” Another example includes “routine offerings to provide the services of the independent business to the public or to a number of potential customers,” which some of our my clients clearly meet. https://www.dir.ca.gov/dlse/faq_independentcontractor.htm
In the case of some of my professional services client, and to add additional confidence, the section of AB-5 I copied below specifically calls out an exception for bona fide business-to business contracting relationships and the criteria to be considered an independent contractor. In criteria (e)(1)(F) they also use the term “independently established business,” but this criteria is used to describe a cross-section of the population described in (e)(1) of “sole proprietorships, partnerships, LLCs, LLPs, or corporations.”
If by “independently established business,” they meant only incorporated entities, all other business types other than corporations would automatically fail this test, but by placing it as a subset criteria I believe that your LLC is a bona fide business to business contracting relationship.
(e) Subdivision (a) and the holding in Dynamex do not apply to a bona fide business-to-business contracting relationship, as defined below, under the following conditions:
(1) If a business entity formed as a sole proprietorship, partnership, limited liability company, limited liability partnership, or corporation (“business service provider”) contracts to provide services to another such business (“contracting business”), the determination of employee or independent contractor status of the business services provider shall be governed by Borello, if the contracting business demonstrates that all of the following criteria are satisfied:
(A) The business service provider is free from the control and direction of the contracting business entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
(B) The business service provider is providing services directly to the contracting business rather than to customers of the contracting business.
(C) The contract with the business service provider is in writing.
(D) If the work is performed in a jurisdiction that requires the business service provider to have a business license or business tax registration, the business service provider has the required business license or business tax registration.
(E) The business service provider maintains a business location that is separate from the business or work location of the contracting business.
(F) The business service provider is customarily engaged in an independently established business of the same nature as that involved in the work performed.
(G) The business service provider actually contracts with other businesses to provide the same or similar services and maintains a clientele without restrictions from the hiring entity.
(H) The business service provider advertises and holds itself out to the public as available to provide the same or similar services.
(I) The business service provider provides its own tools, vehicles, and equipment to perform the services.
(J) The business service provider can negotiate its own rates.
(K) Consistent with the nature of the work, the business service provider can set its own hours and location of work.