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Licensed, Bonded or Insured: Which Do You Need to Be?

Alan Melton

Does your company need to be bonded, insured, or licensed? Probably so. What are these all about and which does your company need?

Bonding

In the past, I’ve known to ask service providers like plumbers and carpenters if they’re licensed and bonded – but I never really understood why. In actuality, bonds protect your business and your customers.

Bonds are a type of insurance that protects your business against financial loss due to mistakes your employees or your business make. There are two kinds:

Surety Bond.

The surety bond will pay your customers when your business makes errors caused by services rendered or products purchased.

Example. The tire you manufactured and sold has a factory defect.

Fidelity Bond.

The fidelity bond will pay your business when losses result (intentionally or not) from employee actions.

Example: An employee embezzles from your accounts.

Bonds and insurance are two different products, though you can purchase bonds from an insurance agency. You can also buy them from a specialty bond company.

Businesses such as the following will need to be bonded:

  • Banks
  • Insurance companies
  • Car dealers
  • Brokerage firms
  • Jewelers
  • Art dealers
  • Construction companies
  • Government contractors

There’s a unique difference between bonds and insurance – when a claim is made, the surety bond company pays for it. Then, your company must repay the payout amount that the bond company made.

A key reason for being bonded is that it’s a draw to potential clients. It makes you look competent, trustworthy, and legitimate.  

Insuring Your Business

A basic protection for any business owner is to be insured against risks associated with your business:

  • Injuries to your staff, customers, or anyone who enters your property
  • Damage to property
  • Transportation vehicles
  • Personal injury (including slander and libel)
  • Theft or damage to property like equipment, electronics, and furniture
  • Unsafe products
  • Professional liability like malpractice or negligence

Check your state insurance laws – only five states currently require disability insurance (CA, HI, NJ, NY, RI). If you have employees, you’ll also need workers compensation coverage. You can also purchase insurance for home-based businesses.

A business must keep accurate records on financials like sales and payroll as this information is used to set your premiums. Be sure to get a variety of quotes on any insurance policy.

Business Licensing

Requirements for licenses depend on your locality. One or more licenses may be required from your city, county, and state for the following areas:

  • Business operations
  • Zoning and land use
  • Building and construction
  • Fire departments
  • Health and safety
  • Signage
  • Environmental

Special licenses may be required for home-based businesses as well.  Contact your area’s SBA or local government agencies for license requirements for you.

Summary

In the end, all businesses will need some form of license, and you should protect yourself with bonds and insurance. Starting up a business? Check out this Business Startup Checklist.

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