When it's Necessary for Sole Proprietors to be Licensed and Bonded

Licensing and bonding are formalities that establish and verify sole proprietors and businesses as capable, legitimate and reliable. Although similar in purpose to permits and insurance, licenses and surety bonds do not function in quite the same way. 

Licenses pertain more to individuals practicing a certain profession whereas permits allow licensed individuals to operate their business. In the case of surety bonds, a bond is purchased by the business to insure clients from their failure to complete a contract or licensed work in accordance with pre-determined agreement and methodology.

Purpose

Understanding what it means to be licensed and bonded involves being aware of the rationale of these professional instruments. Licensing ensures competency and knowledge, whereas bonds insure clients against failure to fulfill licensed obligations. Both of these business tools are sources of revenue for government and bond issuers that also help establish credibility and reliability for a business.

Issuance

Licenses are issued by state and local governments and sometimes federally. Bonds are not always required by governments, but may be asked for by other businesses, or unions seeking to ensure work done for them is compensated for if not completed or performed erroneously. The licensing and bonding requirements for each state vary, but can be found by entering the zip code of practice into the business to government connector website licensing search tool and links. Companies that specialize in bonding professionals usually issue bonds. Sometimes the U.S. Small Business Administration (SBA) may guarantee bonds if the bond issuer considers the bond to high a risk. 

Types

Many types of licenses and bonds exist. This is because the requirements differ based on the nature of the work, regulatory requirements, and industry standards. For example, the state of Michigan requires a license for a barber shop, but not a dog grooming business.  Among the several types of bonding are bid bonds, contract bonds, performance bonds and surety bonds. Each of these bonds serves a specific function, and surety bonds themselves may have several sub-types. For example, surety bonds can be specialized as used car dealer bonds, title agency bonds, and developers bonds.

Cost

There is no one standard cost for either licenses or bonds. The cost can vary depending on factors such as the scale of contract work, and the licensing fees required by a state government. Licensure in some states may require the completion of expensive standardized exams whereas other licenses may have less stringent requirements. Bond cost estimates can be obtained by request via surety bond companies with minimal information. For example, JW Surety Bonds provides online surety bond estimates after the amount, type, email, name and phone number of the business seeking the bond is entered.

Requirements

Licenses and bonds have specific requirements that if not met, may cause the license or bond seeker to be denied. Licenses can require one or all of demonstration of qualification, complete application, fee submission, and successful test scores. Bond issuers may check credit history and score, businesses finances, business history and ability before allowing a bond to be bought and issued to a principal i.e. business seeking to be bonded.

Sources:

1. http://bit.ly/3sq4M7  (Business.gov)
2. http://bit.ly/frVgjp     (Louisiana State University)
3. http://bit.ly/eSSVE5 (Small Business Administration)
4. http://bit.ly/eH2BjT   (JW Surety bonds)