Bonding for Sole Proprietors

By Rachel Moran

A bond is a promise by a bond company, sometimes called a surety, to pay a customer if a service provider fails to meet a contractual obligation and the failure causes losses to the customer. Sometimes bonding is required by local or state law, but, since sole proprietors are personally liable for their businesses, bonding may be advantageous even if it isn't required.

A bond is a promise by a bond company, sometimes called a surety, to pay a customer if a service provider fails to meet a contractual obligation and the failure causes losses to the customer. Sometimes bonding is required by local or state law, but, since sole proprietors are personally liable for their businesses, bonding may be advantageous even if it isn't required.

Purposes

Bonding protects your customers. As the sole proprietor, you pay a premium to a bonding company, either annually or for a given term, to provide that protection. From this perspective, bonding may help induce your customers to contract with you, because they are protected against losses if you fail to fulfill the contract. Further, this protection costs them nothing, because you pay for it. Bonding is beneficial to sole proprietors as well, because sole proprietors are personally liable for their businesses. If you can resolve an issue with a bond payout, that's better than subjecting your personal assets to a lawsuit and, thereby, in some cases, public record.

Ready to start your LLC? Start an LLC Online Now

Coverage

The maximum amount a bond company pays out is called the "penal sum." Its extent is usually determined by how much you pay in premiums – anywhere from 0.5 percent to 3 percent of the contract amount, in most cases. The penal sum isn't a guaranteed payout; it's the maximum coverage on the bond. Any payout is determined by the extent of the damage or loss caused by your failure to fulfill the contract. A bond is not an insurance policy, either. After making a payout, the bond company seeks reimbursement from the sole proprietor.

Parties

Bonding may involve several parties. Even though sole proprietorship entails one person handling all business affairs, a bond recognizes the importance of other parties. For example, bond companies usually require that the spouse of a sole proprietor – or anyone else who may have claims to the proprietor's personal assets – indemnify or agree to reimburse the bond company after a payout, too. This is because personal assets back bonds issued to sole proprietors.

Licenses and Permits

Some municipal or occupational licenses and permits require that a sole proprietor be bonded. This requirement comes from a local or state government as a prerequisite to licensure or permitting; that is, the license or permit is not issued until the proprietor shows bonding. Some examples of required bonding may include that construction contractors bond to guarantee their compliance with local laws or that import/export traders bond to guarantee tax remittance. Spas, health care facilities, babysitters, pet sitters, cleaning companies, environmental companies and others may have to bond, too.

Contract Bonds

Construction contractors almost always bond multiple times throughout the course of a job: during bidding to guarantee they will perform the work if awarded a bid, for performance of the actual construction once it commences, for supply provision during construction or for maintenance afterwards. Construction contractors that want to work with the government must additionally provide their bonding to state certifying agencies that handle government bids. Most construction companies are not sole proprietorships, though, simply because the liability risks are too great.

Other Bonds

Some sole proprietors may have to bond because of a court order. This is an extreme instance where a proprietorship has failed to fulfill contracts in the past or when the court orders a proprietor to fulfill a contract it has tried to avoid. There may be miscellaneous reasons for bonding if a sole proprietor chooses to undertake a personal contract or enter a specific contract that requires bonding, like environmental reclamation or other work.

Ready to start your LLC? Start an LLC Online Now
How to Apply as an Administrator of an Estate

References

Related articles

Duties for a Co-Executor of a Will

The last will of a deceased person contains the provisions and terms for inheritance of his assets after death. A will names an executor, the person who controls the estate, but the deceased person can name more than one person to fulfill the duty. "Co-executors" is the term used to describe multiple persons named as the executor in a will. All co-executors share the same authority over the estate; however, the duties are more involved, as the executors must work as a team and are all held responsible for the estate as a group.

Fundamentals of Bankruptcy Law

The purpose of bankruptcy law is to give an overburdened debtor a fresh start by discharging his debts or allowing him to pay them on more favorable terms. This process is supervised by bankruptcy courts. Because assets and creditors are so often located in different states, bankruptcy law is federal law rather than state law.

Joint Executors of Wills in Pennsylvania

An executor is the person named in a will to administer the estate when the will maker, or testator, dies. An executor should be trustworthy and financially responsible, as his role includes paying all the bills involved in the estate, distributing property, communicating with beneficiaries and heirs, and filing forms with the probate court, the IRS and other agencies. Pennsylvania law does not restrict the number of people you can name as joint executors.

LLCs, Corporations, Patents, Attorney Help

Related articles

Does a South Dakota Lawyer Have to Notify Me If I Am Named in a Will?

Executors, also known as personal representatives, who manage the distribution of an estate in probate hearings when a ...

How to Appoint an Executor of an Estate Without a Will

An estate that does not have a will is considered intestate. One of the probate court’s duties with regard to ...

If a Creditor Does Not File a Claim in the Decedent's Estate in Alaska, Do You Have to Pay the Claim?

The right of a creditor to file a claim in an Alaskan probate proceeding is very specific, with little room for error. ...

Common Sole Proprietorship Industries

Sole proprietorships are a popular business structure because they are simple to set up and have few state filing and ...

Browse by category
Ready to Begin? GET STARTED