Companies often use the phrase “licensed and bonded” to show its legitimacy and trustworthiness. When hiring someone to provide a service, it is important that the client ensures the service provider is licensed and bonded to safeguard against poor workmanship, theft, and illegal practices. A client should also check for documented proof of bonds and licensure.

Being licensed ensures that the service provider has been trained in the proper practices and regulations concerning his service. This means the licensee is competent and capable of doing the work at hand. It also means the worker is familiar with the laws and standards of his field in that particular area of governance and can be held accountable if the regulations are not followed. The service provider may lose its license to operate in that municipality, state, or the country if rules are not followed. A client may also use the company’s license number to research through the Better Business Bureau.

In many cases, a company may just be licensed, but it is important they are bonded as well. If a company is bonded, it means that a bonding company has set aside money that is controlled by the state and not the company to pay in the event that the client files a claim against the company. For example, if the client hires a plumbing company and a household good was broken or stolen in the course of the plumber’s work, a client might file a claim against the company. If the ensuing investigation found the plumbing company responsible, the client would be paid out of the bond. A company can also get bonds for employees who are working with very valuable property, which usually involves a thorough background check.

Becoming licensed and bonded varies depending on the type of business and the area the business is located in. To become licensed, professionals commonly have to pass competency tests, show evidence of experience, pass tests to show mastery of laws and regulations, have a clean criminal record, and have a surety bond. These requirements are common, but do not apply to all businesses in all locations. Some licenses do not require a bond, so it is important when hiring a company to make sure it’s licensed and bonded, or at least licensed and insured. In this situation, the licensing requirements and insurance policy should be reviewed by the client.

Surety bonds are three party contracts between the principal, who performs the service, the obligee, or client, and the surety, who financially ensures that the principal will fulfill its contractual obligation. The principle pays a premium fee to the surety, who in turn pays the obligee if the principle defaults on its contract. An example of this might be if a client hired a licensed and bonded lawnmower and the lawnmower only mowed half the lawn. The surety will then reimburse the client for the original fee charged as well as any legal fees from the investigation. Bond companies sell bonds to companies at competitive prices based on the risk of the service provided.