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What is a License Bond?
A license bond is a bond that is required by certain governmental entities, such as a municipality, which allows someone to engage in a specified activity (as you can see below – there are a lot of types of these bonds). The person seeking the bond is needing this permit bond to perform the activity and the bond ensures that the party wanting the bond will comply with the rules and regulations of the municipality. The person seeking the bond is known as the Obligor and the governmental entity is the Obligee.
License & Permit Bond
In many states, a license & permit bond is actually required before you can do any work. For example, a roofer in Texas will need a license & permit bond before starting any jobs. This is different from many other states where a license & permit bond is not required.
A license bond is similar to a license and permit bond only it's limited in what is required. For most purposes, you can consider this the same thing as a license and permit bond, as it's really a requirement to doing business within the state.
What is a License and Permit Bond?
As we mention above, a License and Permit Bond is something that is required by a governmental entity to ensure that the business is abiding by all required laws. It protects the consumer and, in many cases, protects the government.
What is the Cost of a License & Permit Bond
The cost varies considerably depending on the type of bond. Many bonds only cost one percent (1%) of the total bond amount. So, for a $20,000 bond, the cost would be $200. For other bonds, the cost runs as high as 15%.
A permit bond is a surety bond that provides protection for a permit business. Typically used in commercial projects, the bond provides protection for business that the government requires to get a permit, such as a building permit.
License Surety Bond
What is a Contractor License Bond?
It's a surety bond for a contractor to get a license in a certain area. Governments require the Principal (the contractor) to get a bond to protect the Obligee (the government) through a third party (the surety).
Do you Need a License and Permit Bond?
Yes. In many places it is required before working in that area.
License and Permit Surety Bond Types
- Administrator Bond. An administrator bond is a bond required by a court of law for someone who is acting as the administrator in a probate case (technically, an intestate estate). This bond protects beneficiaries and creditors from dishonesty or willful negligence on the part of the person acting as administrator.
- Agents, Athletic Bond. More commonly known as a sports agent bond, this type of bond is required by certain states. This bond is really a sub-species of a license or permit bond. This bond provides that the sports agent will act according to the rules and abide by the terms of the agency contract (that is, they will not take any additional funds above and beyond those found in the agency agreement).
- Broker, Freight Bond. A freight broker bond is required for your freight business. It protects motor carriers and shippers according to the FMCSA rules and regulations. The typical claim is made when a motor carrier is not made.
- Cemetery licensee Bond. Certain states require a cemetery to have a license bond. This bond makes sure that the cemetery operators will abide by the rules and regulations within that state.
- Collection Agency Bond. Collection agencies are required to have a bond, in certain states, before they are issued a license to collect funds from debtors in that state. These are also known as debt collector bonds.
- Cigarette Tax Bond. These bonds are issued by proprietors that sell cigarettes. These bonds are required by the state before you are issued a license to sell cigarettes and they guarantee that the taxes will be paid to the state.
- City Ordinance Compliance Bond. This is really a catch-all term used to show that a business is complying with the various rules and requirements of a city's ordinances. In New York City, these are pretty common, while in the Midwest are fairly rare.
- Concessionaire Bond. A concessionaire bond is required in certain areas for persons wanting to open a concession stand. Again, these bonds make certain that you are operating in accordance with the various codes. Side note: one of the main impetus' for food trucks was their ability to operate without this type of bond or under the same rules.
Types of License Bonds
- Contractor's License Bond. A contractor's license bond is required in certain states before a contractor can perform any work. In Oregon, the contractors state license board is a central part of this.
- Private Eye/Detective Agency Bond. Dick Tracy, move over, it's a new world. Instead of just opening up a private detective shop in the basement, many municipalities require a bond. This keeps private eyes on the up and up and within the bounds of the law. Well, at least as much as possible.
- Bond protecting against a Defective Title. When selling a vehicle, most people just simply pass title. However, in certain circumstances, the title has been lost or there is some other problem. In these cases, the state will transfer title, but only if a bond is issued. That way, the buyer can be assured that there is not a defective title and will therefore transfer title.
- Employment Agency – Surety Bond. Different rules apply to employment agencies around the country, but the basic rules apply in that a bond is required to make sure that all rules are being followed, taxes being collected and other payments being made.
- FHA Bond (Federal Housing Authority). A FHA bond is required for business to offer certain types of FHA loans. Thus, a mortgage broker could have a bond instead of having their financials audited (a much cheaper option to be sure).
- Fidelity Bond. A fidelity bond is one of the oldest uses of bond in the world. A fidelity bond is simply an agreement for one party (the surety) to provide assurance to another party that the person being guaranteed will live up to the terms of the agreement. Fidelity bonds are usually personal in nature.
- Fiduciary relationship Bond. This type of bond is required when a fiduciary relationship is created, such as when a person is an executor of a will in a court proceeding (it could also be used by a guardian/conservator). Thus, the fiduciary enters into a bond so that the beneficiaries are assured that no malfeasance will occur.
- Fuel Tax Bond. This bond is needed by fuel sellers. Also known as an IFTA bond, it helps provide assurance that taxes will be paid by the fuel seller.
- Health/Fitness Club Bond. Many locations require a bond by a health club as there are a variety of rules and regulations that apply to them, including certain taxes and other health codes and related permits.
Types of License and Permit Bonds
- Home Seller (Dealer) Bond (Mobile Home Dealer). Mobile home sellers have a requirement for a dealer bond. This bond protects against dishonest sellers. These bonds protects consumers from misrepresentation, fraud and other perceived bad dealings in the mobile home market.
- Home Improvement Repair Professional Bond. Some states require a bond for handyman services, known as a home improvement repair bond. These bonds protect against fraud, misrepresentation and theft.
- Hunting & Fishing License Bond. These bonds are required by those that sell fishing and hunting licenses. The states of Florida and New Jersey have a lot of business that require these bonds.
- Insurance Broker – Surety Bond. Some states require that insurance brokers become bonded. These bonds protect consumers against misrepresentation and broker problems that they have no insight into.
- Dealer Motor Vehicle Bond. A motor vehicle dealer bond is required for most states for those that want to sell vehicles. Especially necessary in the used car market, these bonds protect both consumers against fraud as well as the state to make sure that proper regulations are followed.
- Payday Lending Bond. Payday lending has been increasingly within the spotlight in recent years. Given the increased scrutiny and negative public perception, bonds are now being required by most areas. These bonds are for those that want to get into the payday lending area and are needed prior to issuing a license to set up a payday lending operation.
- Pest Eradication Bond. Pest control companies are now seeing a requirement for bonds. These bonds protect consumers to make sure that the pest control company has the proper permits, especially with the handling and disposal of the harmful chemicals that can be used.
- Plumbing Business Bond. Some states require plumbers to get a bond prior to being licensed. These plumber business bonds are needed to protect consumers from fraudulent home repair/installation practitioners.
- Pre-need Funeral Sales and Service Bond. A pre-need funeral bond is required by certain states (like North Dakota) prior to issuing a state license.
- Private Detective (Investigator) Bond (for a personal license). This is similar to the one required for an entire agency. Single agents also need a bond for their personal license. This is a great example of a fidelity bond.
- Public Official Fidelity Bond. Public officials may be required to put up a bond to make sure that they uphold their duties in good faith. These are especially used for public officials that have access to funds or other private information, such as the county clerk. These are some of the oldest types of bonds that have been issued. In the 1800's, these were standard in many public offices and were usually granted by another individual.
- Roofers Bond. Roofing companies, in some states, are required to obtain a bond prior to getting a home improvement/installation license.
- Sales and Use Tax Bond. This bond is required by your local state government for business that are involved in retail sales, or that rent goods or leases. The bond protects the government and makes sure that it will received its taxes by the retail business.
- License Bond, Signs and Advertising. Given that advertising, especially for signs (drive down the highway and you'll see what I mean), can be a difficult business, a bond is required to make certain the the signs abide by all local laws and regulations.
- Small Business Loan Bond. Lenders to small businesses are required to get a bond. These bonds protect consumers against deceptive sales practices as the perception is that small businesses are not as sophisticated and may not fully understand the consequences of their actions.
- Surplus Insurance Lines Broker Sales Bond. Large insurance carriers need to carry a bond to ensure that their capital does not become impaired. These bonds protect against improper sales in the business for surplus lines.
- Tax Preparation Bond. Tax preparers, like H&R Block or Liberty Tax, have to become bonded. Most states require these bonds now, which is an outgrowth of the tax fraud cases of several years ago (not against H&R Block, though) where tax preparers were filing returns that they knew were improper.
- Real Estate Title Bond. Title companies, in many jurisdictions, are required to have a bond. This is needed as the real estate market needs to have assurance that title companies will be around in case of claims against titles.
- Transportation Bond. These bonds provide assurance for payment regarding shipments of good within any of the United States. These bonds make sure that carriers can get paid, which helps facilitate the flow of commerce.
- Utility Deposit Bonds. A utility deposit bond is a guarantee that a party will pay their utility bill on time. Usually used in large-scale projects, these are not typically used for consumers.
- Warranty (Product or Otherwise) Bond. A warranty bond makes sure that a contractor performs work according to the owners' satisfaction. It further provides assurance that the work being done meets all applicable codes and other statutory requirements.
- Wholesale Distribution of Fuel (non-retail) Bond. Wholesale distributors are required to put up a bond to make sure that all applicable laws are being followed and that taxes are being withheld and paid properly.
Permit and License Bond
License and permit bond are in huge contrast to most types of contract bonds or other types of bonds that might be required by the federal government, municipal governments or the state government. These bonds are required if any business wants to keep their commercial license to continue operating in the state. They will need to provide assurances that their business is financially secure and that it protects the safeguards set for the public's safety, morals, welfare and health. Even though most of these bonds are only able to cover up to the limit explicitly state on penal sums, it will also provide the business with coverage for taxing authorities, suppliers and laborers. You must then purchase additional forms of coverage through liability policies for commercial use. Since bonds are not considered to be a type of insurance contract, you will need to understand that it will not cover property damage or third party injuries that result from any type of negligence from the contractors.