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What Is a License Bond?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 23 July 2014
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A license bond is one of several different types of commercial bonds that are required in order for an entity to engage in certain business practices. Bonds of this type may be necessary before a local municipality, or a state or federal agency will provide the license needed to legally engage in those specified business activities. The idea behind this type of bond is to ensure that the individual or business being granted the license understands and will comply with all standards, laws, ordinances and regulations that apply to any business activity that is covered under the terms of that particular license.

The license bond is often considered a form of surety bond or performance bond, since the instrument acts as a pledge or commitment on the part of the recipient to comply with any jurisdictional requirements necessary to obtain the type of business license needed to provide services within that community. Essentially, the bond is a guarantee of compliance that helps to assure the agency that grants the desired license that the business owner knows and understands what must be done in order to operate within the limits of the law. Revocation of the license bond may take place if the business owner knowingly violates any of these regulations, which in turn opens the door to losing the license granted by the local agency.

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One of the easiest ways to understand how a license bond functions is to consider an electrician who wishes to offer his or her services to residential customers residing in a specific community. As part of the process for applying for a business license, the electrician will also obtain a license bond. The bond is presented to the agency that issues business licenses and serves as evidence that the electrician understands local standards and regulations, and is prepared to abide by them. In some jurisdictions, failure to obtain the license bond means that the chances of receiving the business license are slim to none.

Businesses of all types may be required to obtain license bonds that relate to their specific fields. Along with electricians, professionals such as general contractors, construction professionals, and plumbers are also likely to need a license bond as part of the process of receiving and maintaining a business license. In some areas, local agencies can provide interested parties with instructions on how to secure a license bond, as well as outlining the process and qualifications that must be met in order to be granted a business license.

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