Commercial bonds, also known as business bonds or surety bonds, guarantee that a contractor will fulfill the obligations of their contract. Bonds are often required by governments, entities, and legislation, and can help establish credibility by guaranteeing that work will be performed properly, on time, and in accordance to local, state, and federal laws and regulations.
There are three parties involved in the bond process:
- The principal – the party being contracted to perform work
- The obligee – the party that is requiring the bond
- The surety – the bond issuer who guarantees the performance of the principal
In the event that the principal defaults or otherwise fails to perform the work that they were contracted for, the obligee can file a claim with the surety.
Depending on their industry and the state in which they are located, many businesses and contractors may be required to be licensed and bonded before they can begin operating. These requirements help protect governments and the public from a principal’s failure to fulfill their contract.
Types of Commercial Bonds
License & Permit Bonds
A license and permit bond guarantees a principal’s compliance with local, state, and federal laws and regulations relevant to their industry and type of business. (Plumbing, Electrician, HVAC, Public Adjuster License bonds.
Public Official Bonds
A public official bond is required for certain holders of public office to guarantee that they will faithfully perform duties as prescribed by law. (Board of Education Members, Treasurers of private or non-profit organizations)
Notary Public Bonds
A notary public bond guarantees that a notary public will faithfully perform duties as prescribed by law, which protects the public against financial loss due to improper conduct or error.
Commercial Crime/Fidelity Bonds
Commercial crime/fidelity bonds protect employers from employee dishonesty. Such bonds will pay for the loss of income or property due to employee misconduct.
Client’s Property/Third Property Fidelity Bonds
A client’s property bond, or a third property fidelity bond, protects service contractors in the event that one of their employees steals a client’s money or property.
Fiduciary bonds, also known as probate bonds, guarantee faithful performance from those who administer court-appointed trust, such as family members appointed as executors of a decedent’s estate, or an appointed guardian of a minor or incapacitated adult.
A judicial bond guarantees that any damages, court costs, and attorney fees that result from court action will be paid for by the principals.
ERISA/Pension & Profit-Sharing Bonds
Required by the Employee Retirement Income Security Act, ERISA bonds protect employee retirement plans against losses due to fraud or dishonesty.
Tax Preparer E&O Bonds
A tax preparer bond protects the public by guaranteeing that the tax preparer will operate with honesty and transparency, and not do anything that will cause their clients harm.
Bid bonds guarantee that the principal will fulfill their obligation to the obligee according to the terms of a written contract, particularly in the case when a contractor bids on a public project, such as a construction project.
A performance bond guarantees that the principal will perform work in accordance with the terms and conditions of their contract.
Maintenance bonds guarantee that work will be performed without defects in terms of materials and workmanship. Maintenance bonds are typically issued in conjunction with performance bonds.
A supply bond guarantees that materials or equipment will be delivered as promised by the supplier; it usually includes both performance and payment obligations.
A customs bond guarantees all duties, taxes and necessary fees are satisfied to customs when importing commercial goods into the United States over $2,500.