There's often a lot of confusion when it comes to exactly what it means for a business to be bonded, licensed, and insured. Many people struggle to explain it, and many small business owners aren't sure whether their business needs to be all or some combination of the three. While there can be advantages to your business by being bonded, licenses, or insured, they may be legally required to run a business in your city, county, or state.
We're going to dig into what it means to be bonded, licensed, and insured. We're also going to take a look at some average costs involved, and help you get a better sense of whether your business needs it.
What it means to be bonded
When a business is bonded, it means a bonding company has set aside a certain amount of money to cover that business in cases where a customer makes a claim against the business. If a customer files a claim, the bonding company will initially pay them up to the total amount bonded. However, in the end, the business owner is responsible for reimbursing the bonding company for the total amount they paid out. Think of bonds as a type of credit provided by the bonding company—claims don't have to be paid out of your pocket immediately, but they will need to be repaid in full eventually.
Bonds are usually good for between 1-4 years, depending on the terms of the contract. They can also be renewed before the end of each term. There are a variety of bonds, and each one serves a different purpose.
Because bonds are a type of credit, the cost of purchasing a bond is mostly dependent on your personal credit score (or business credit score if you have established business credit). With a good credit score, you can expect to pay between 1-4% of the total bond amount. Many insurance agencies sell bonds, and you can also get them from companies that specialize in selling bonds specifically.
License and permit bonds
License and permit bonds protect consumers by ensuring your business is in compliance with all applicable laws and regulations. If your business were to violate any these rules, a customer can file a claim against your bond. These bonds are sometimes legally required in order for you to get a license or permit for the type of work you're doing.
Business service bonds
Sometimes known as janitorial bonds, cleaning bonds, or fidelity bonds, these bonds help protect your business from losses caused by employee theft. For example, if you run a cleaning business and one of your employees steals a watch while cleaning a customer's house, the customer can file a claim with your bonding company, and you won't have to pay for the stolen item out of your own pocket.
Business service bonds aren't legally required, but they often go a long way in ensuring your customers their valuables are safe—which you can use as a competitive advantage. Businesses that might consider getting one include cleaners, landscapers, house painters, or any other service business where employees are working on-site at a customer's home or office.
Contract bonds cover the performance of a contract, including whether the project finishes on time or if it stays within budget. They provide customers with a guarantee the work will be completed, and that it covers the agreed-upon terms. Contract bonds are only ever required when a customer specifically asks for one, and are often requested for public or government contracts.
What it means to be licensed
Being licensed is something that almost all businesses will need to do. Businesses are required to be licensed so they can be identified and held accountable for their actions, to protect the interests of the public, and to track their revenue for tax purposes.
Almost all businesses will need to get a general business license from their city, county, or state at a minimum. In some jurisdictions, a business may need a license from all three. An average price for one can be difficult to pin down, as cities, counties, and states typically have a variety of license fees that entirely depend on the specific type of business and what it does.
General business licenses typically need to be renewed every year.
Depending on the type of business you're running, you may need additional licenses. Usually called occupational or professional licenses, these licenses are meant to ensure you've met all legal requirements set by your state for practicing a particular profession. Professional licenses also indicate your business is following the necessary rules and regulations of your profession. You may be required to take tests, classes, or acquire certain certifications in order to obtain a professional license in your field.
To find out what type of licenses you may need, start by contacting your local city hall and county courthouse. They'll provide you with all the details and proper forms and applications. You should also check with your Secretary of State office to see if you need to be licensed by your state as well.
Getting proper licenses for your business can be a bit of a pain, but the costs of operating a business that isn't following legal requirements is often far more painful.
What it means to be insured
We all know what insurance is and the value of it in our personal lives, but it's also something that's important to have when running a business. There are a few different types of insurance you should consider, depending on the needs of your business.
General liability insurance
This type of insurance will protect you and your employees from damages in instances where a customer might suffer property damages or bodily harm. For example, if you're mowing someone's lawn, hit a rock, and break a window, general liability insurance will cover the cost of replacing the window. This kind of insurance is generally very affordable, depending on the sort of work you're doing—businesses that work in or around other people's property will often pay a little more for general liability insurance than those who do not.
Commercial auto insurance
If you do a lot of driving for your business, commercial auto insurance should be something you seriously consider. It covers vehicles you own that are used to transport you, your employees, and any equipment you may bring to jobs. Most importantly, it protects you and your business in the event of an unexpected accident. Personal auto insurance won't cover an accident that happens when you're using your vehicle as a work vehicle, which means you could be facing repair and injury bills you're not able to pay. Commercial auto insurance, while usually more expensive than personal, provides far more protection if you're regularly using your vehicle for business-related things.
Non-owned auto insurance
This insurance can be useful if your employees use their own vehicles for work purposes—carrying equipment to a work site, delivering something to a customer, etc. It protects you and your business from directly being sued if an employee gets into an accident while performing work-related activities. It doesn't cover accidents during a work commute or pay for physical damage to the non-owned vehicle. Non-owned auto insurance can usually be added to an existing general liability policy.
Workers' comp provides medical care and lost wages to any employees who get hurt while working for your business. It also acts as a safeguard for your business against lawsuits an employee may file due to work-related injuries. Depending on the number of employees you have, you may be legally required to have workers' comp insurance. It's generally required when you have around 3 or more employees, although the rules vary by state. Some business customers you may wish to provide services might also expect you to have workers' comp before they hire you. Contact your state's workers' compensation office here to determine the exact requirements for your business and state.
How much does it cost?
Understanding what it means to be bonded, licensed, and insured is only part of understanding how it impacts your business. Costs matter to every business, and often more so to small service businesses who typically operate on thin profit margins. Here's a quick breakdown of most of the types of bonding, license, and insurance costs to give you an idea of how affordable these sensible protections are:
|Bonding||1-4% of bond amount
(e.g., $10K bond costs $100-400)
|City business license||$15 and up (depends on city)|
|County business license||$15 and up (depends on county)|
|State business license||$50 and up (depends on state)|
|General liability insurance||$400-1,000|
|Commercial auto insurance||$900-1,200|
|Non-owned auto insurance||$150|
Should your business be bonded, licensed, and insured?
You may be asking yourself if you need to be bonded, licensed, and insured. Like so many things when it comes to running a business, it depends on what your business is and does. However, one thing is a no-brainer if you're operating a service business—get your city, county, and state business licenses (where applicable). Getting the proper general licenses for your business should be your first priority. If your business isn't in compliance with your state, county, and local laws, you could face heavy fines, and could risk losing your business. Check with your city hall, your county courthouse, and state business offices to see exactly which licenses you need.
Bonds are important to your service business if they're legally required for the licenses your business needs, or if they're a requirement of the job you're doing. Otherwise, being bonded can be seen as optional in the early days of your business. A business service bond may be helpful if you have employees you don't know too well—common in industries with high employee turnover—and are working directly in a customer's home or business. But it isn't something you should feel like you need to have, especially if you're working with family or you completely trust your employees.
Insuring your business is too often dismissed as not being necessary, especially when you're just getting started. But it can and will save your ass when something goes wrong—especially when you're just getting started!. Almost all small businesses benefit from general liability insurance, and there are several other types of insurance that protect you as well. So talk with your insurance agent, find out what kind of coverages they offer, and ask them which is suitable for your business. They're going to help you land on something that is affordable and sensible. Most agencies also offer a Business Owner's Policy, which bundles together multiple types of insurance policies and can save you a lot of money compared to buying each policy separately.
Being bonded, licensed, and insured protects your customers, you, and your business. It also has the nice side effect of making your business look legitimate to potential customers. For these reasons, as well as to be in compliance with applicable laws, we encourage you to research each one and find out exactly what's needed for your business.