The term "licensed and bonded," or "licensed, bonded and insured" gets tossed around a lot in some industries. Besides sounding badass, many customers, and even small business owners are often unsure as to what this term means. However, when it comes to licensing and bonding, there are several important definitions to note, as well as several important takeaways.
A license is any document that indicates your company has the right and privilege to conduct business at all. All states, cities or municipalities have business licensing requirements. Depending on the type of business you're running, there are one of two ways you will acquire this.
In most places, you will be able to purchase a business license, after completing the requisite paperwork. It's important to keep in mind that a license is not the same as a permit. While a business license will allow you to get up-and-running, certain aspects of your business may need separate permits. For example, if you are starting your own trash removal service, you can acquire the business license to begin operations, but you may not be able to do much business until you receive certain permits for waste management.
Some industries, such as legal professions and home security in various states, require you to pass certain tests before you're allowed to obtain a license. The more technically complicated the profession, the more likely it is that a test will be required. Additionally, many professions that involve risk of personal injury or security of clients, or that could have potential environmental impacts, will require you to complete a test before obtaining the license. In both cases, obtaining the license is typically not free, although in some cases a state or municipality may grant waivers if you have already obtained a license elsewhere.
"Bonds" are perhaps one of the most confusing types of insurance for any company. When a company claims that it is "bonded," it may not hold the kind of bond that matters to you. A “bond” does not always guarantee that the client will be protected as a result of having that bond. This is because there two basic types of bonds a business can purchase:
Both Surety Bonds and Fidelity Bonds are a separate class of insurance. There are other kinds of bonds that are unrelated to insurance, such as bail bonds, or government bonds.
These two types of bonds exist to reimburse individuals or companies in the case of incomplete services or theft. However, between the two, Surety Bonds will protect a customer, while Fidelity Bonds are meant to protect a company. Therefore, when a company claims that it is "bonded," it's important to determine which type of bond it means.
Surety Bonds
A Surety Bond is often required by a licensing state or municipality. The business will purchase a bond amount (determined by the state), which the state will hold secure. If a business fails to meet its contractual agreements with a client or an employee of the business steals from the client, the bond money will be used to reimburse the client. The purpose of this is to ensure that a client does not need to haggle with an insurance company to receive compensation for incomplete work or stolen items.
Fidelity Bonds
Fidelity Bonds, however, are explicitly designed to protect a company against their own employee’s or contractor’s actions. If an employee embezzles money, for example, an employee dishonesty bond would provide your company with compensation. The purpose of the Fidelity Bond is to ensure that your business has internal protections. These bonds do not benefit your clients or customers in any way.
Not every business will need both Surety Bonds and Fidelity Bonds. Similarly, not every business will need to purchase bond insurance at all. It's important to make sure whether bond insurance is required for your business, or whether it would prove to be beneficial. When doing business with another company that claims to be bonded, make sure that the type of bond they hold is a Surety Bond. Surety Bonds are the only type of bonds that will guarantee you will be reimbursed should a breach of contract occur.