Danielle Rodabaugh is the chief editor of the Surety Bonds Insider, a publication that tracks developments that affect the surety industry. The Surety Bonds Insider is produced by
SuretyBonds.com. As a member of the company's educational outreach team, Danielle also writes informational articles to help self-employed business owners better understand the legal intricacies involved with bonding.
Starting and managing a business for the first time can be intimidating for anybody. Fortunately, self-employed business owners can expand the opportunity for success when they understand the legal implications that could affect their start-ups. Even though surety bonds are prerequisites for many license and registration processes, their potential legal implications often remain unknown. As such, this primer will address two key reasons why self-employed business owners need to know about surety bonds.
Many professions use surety bonds as prerequisites to business licensing.
Government agencies typically require surety bonds as a way to regulate industries and protect consumers from potential financial loss. Not all industries enforce surety bond regulations. However, if you work in an industry that provides services to consumers, chances are you'll have to file a surety bond before getting your business license. In the
surety market, these bonds are known as license and permit bonds.
A few common professions that almost always require surety bonds include:
- auto dealers
- contractors
- health care professionals
- insurance brokers
- professional cleaning services
- real estate agents
Be aware that surety bond requirements vary by state and can even be specific to the county or city in which your business operates. If you're looking for more information on surety bonds in your geographic area, contact the government agency that regulates your profession.
Surety bonds are legally binding contracts.
As with any other legal document, you should always read the language to understand the specific contractual obligations you're agreeing to before purchasing a bond. Generally speaking, each surety bond that's issued binds three entities together in a contractual agreement.
- The principal is the business owner or other working professional who purchases the bond as a financial guarantee of future work.
- The obligee is the government agency that requires the bond as a way to regulate industries and protect against financial loss.
- The surety is the underwriter that issues the bond as a financial guarantee of the principal's ability to follow industry regulations.
If a bonded principal does not fulfill the bond’s terms, then the obligee can make a claim against the bond to collect reparation for damages. If the claim is found to be valid, the surety will reimburse the obligee.
Learning how surety bonds work now will allow you to use bonding to your advantage later on. When
planning to start a new business, you have plenty of time-consuming concerns stressing you out. Don't let bonding be one of them.