In certain industries, consumers are advised only to do business with companies that are licensed, bonded and insured. For some industries, these three credentials are a requisite of doing business, but many companies don’t need to check all three boxes to operate legitimately. Whether a business needs all three of these credentials, any combination of them (like getting licensed and bonded) or none of them depends on factors such as the type of industry, the governing state and local law and, in some cases, the preference of the business owner.
Types of Business Licenses
A company may have a single business license, multiple licenses or none at all. Business licenses issued by a jurisdiction, such as a city, county or state, are not the same as specialized business licenses issued by certain trade organizations. If a business is located in a rural county, for example, the business owner may not be required to have a business license. But within that same county, if a business is located in certain city limits, the business owner may be required to hold a license.
Workers in some trades, such as electricians and plumbers, typically must have specialized trade licenses or work for general contractors or subcontractors who hold the proper licensing. Even when workers or businesses within these niche professions are not required to have a specialized license, potential clients are generally more confident hiring a company that willingly produces a trade license. These licenses require businesses and/or workers to complete coursework, perform supervised field work and pass an exam.
Read More: Are Business Licenses Public Records?
When a Business Is Bonded
Bonding adds a measure of assurance and protection to potential clients of a business as well as giving the business itself a measure of protection from certain risks. To become bonded, a business (known as the “principal”) purchases a surety bond, which protects consumers in the event of a financial loss due to improper business conduct.
For example, if a business is bonded, a customer can recoup her losses if an employee of the business steals or damages the customer’s property. The company who issued the surety bond to the business will pay a customer’s valid claim (up to the amount of the bond) if the business does not reimburse the company. But the business is not off the hook, because it must then reimburse the bond company.
Insuring a Business
Although a surety bond is an insurance policy of sorts, its protections relate chiefly to theft or damage. When a company is insured, on the other hand, the business insurance policy covers on-the-job injuries. Surety bonds protect customers, but insurance policies protect policyholders and their covered employees. If, for example, a house painter falls off a ladder, he can file a claim against his company’s business insurance.
If the company is not insured, the worker may file a claim against the customer’s homeowners insurance policy, which could result in higher insurance premiums for the homeowner. This is why it’s important for customers to ask to see proof of insurance from certain contractors they hire to perform work on their property.
Licensed, Bonded and Insured
If a business holds all three credentials of being licensed, bonded and insured, it holds all the necessary licensing, including any required trade license; it has a surety bond to protect customers from damage or loss; and it has a business insurance policy to protect its workers against on-the-job accidents.
To become licensed, bonded, and insured, each business must do its due diligence. To be properly licensed, a company must comply with all laws at the business location; to be bonded, the business must contact a surety bond company; and to be insured, the business must obtain an insurance policy from a company that issues business policies, and it must pay the premiums on time.
Victoria Lee Blackstone was formerly with Freddie Mac’s mortgage acquisition department, where she funded multi-million-dollar loan pools for primary lending institutions, worked on a mortgage fraud task force and wrote the convertible ARM section of the company’s policies and procedures manual. Currently, Blackstone is a professional writer with expertise in the fields of mortgage, finance, budgeting, tax and law. She is the author of more than 2,000 published works for newspapers, magazines, online publications and individual clients.