LLC Bonds – Ensuring On-Time Employee Compensation

Are you in the throes of starting a business? Looking to launching a Limited Liability Company (LLC) as your business model structure? Then, you would probably like to learn how to register your LLC business and get it bonded.

According to the U.S. Small Business Administration (SBA), an LLC refers to the type of corporate structure that “provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership.”

LLC business owners are the “members,” where they consist of either one or more individuals or corporations acting like owners. Each state has its rules and regulations when forming LLCs.

An LLC is a government tax-exempt entity, meaning the federal government does not tax the business itself. However, all federal income taxes (profits and losses) are passed on to the LLC’s members. The members pay their personal federal income tax. All LLC must file as a partnership, corporation, or sole proprietorship. Some states do tax income on an LLC, so it is best to check with your state’s revenue agencies.

Now that we have covered what an LLC is, we explain why it needs to get a surety bond.

Why do LLCs need to obtain an LLC Bond?

In the process of obtaining business licenses and permits, some states require the extra step of posting a surety bond for their LLCs.

According to the California Business and Professions (B&P) - Section 7071.6.5, an LLC that wishes to obtain a license must post a $100,000 surety bond (in addition to the $15,000 contract bond). The bonds are required “as a condition precedent to the issuance, re-issuance, reinstatement, reactivation, renewal, or continued valid use of a limited liability company license.

They serve to benefit any employee from losses and damages resulting from the LLC’s failure to pay compensation on time, interest on wages or fringe benefits, as well as any other specified contract contributions.

In an LLC bond, the principal is the LLC, the obligee is the state that requires protection of the beneficiary (employee/worker), and the surety company that provides financial backup for the principal.

If an LLC fails to provide the guarantees as mentioned above, the obligee may file a claim against the surety bond, which the surety will compensate to settle the claim.  When a claim is legit, the principal will reimburse the surety for any amount paid out.

In 2010, the Contractors State License Board (CSLB) was commissioned by Senate Bill 392 to issue licenses to LLCs which were not previously made available. Consult with the CSLB for a complete list of LLC license requirements (and certified attorneys). In addition to the LLC bond, a $15,000 contract bond is required.

What are the benefits of an LLC bond?

Many business owners prefer to set up an LLC because of its flexible business structure that merges elements of conventional corporate and partnership structures.

By implementing an operating agreement, owners can typically establish their rules for governance and protective provisions for all the members.

LLC owners, or members, are classified as self-employed according to the U.S. Internal Revenue Service (IRS). However, LLC employees are not. LLC owners require the filing of returns and payroll taxes akin to every other business type for their employees/workers.

LLC bonds protect LLC employees so they can receive just compensation for their work. And it is not just about paying wages on time; it is also about having the LLC ensure the proper filing of taxes which is included in the employee’s payroll.

How much does an LLC bond cost in California?

Each surety bond costs depend on the amount of the bond required by the obligee.

For LLC employee/worker bonds, CSLB established that the bond amount to be set at $100,000. The bond amount is quite significant; the premium that the principal (applicant) should expect to pay will be determined by the surety underwriters once they have evaluated the principal’s financial capabilities.

For principals with sound credit, these bonds encompass only 2% of the total bond amount. So the cost would be $2,000 a year for a $100,000 bond. The principal would also have to post an additional $15,000 contract license bond.

How long does an LLC bond remain valid?

LLC bonds run concurrently with the license and require annual renewal.  This process may require premium payments for the next year.

A surety company can cancel the LLC bond at any time by the Code of Civil Procedure, Section 996.310-996.360. The article indicates that the surety must notify both the obligee and the principal. Once notified, the bond’s cancellation will take effect at the earliest. During the cancellation of the bond, it is the responsibility of the principal to secure a new bond within thirty days after cancellation, or they run the risk of facing further penal action (which includes the revocation of license).

What else do you need to obtain an LLC bond in California?

In addition to the $100,000 LLC bond and the $15,000 contract bond, LLCs seeking licensure must complete an application process.

The application process entails:

  • Application fees
  • $1 Million minimum liability insurance policy
  • $1 Million personal liability during Secretary of State Suspension
  • Personnel of record
  • Qualifying individual - must be qualified by a responsible managing employee, officer, manager, or member
  • Liability insurance information on contracts
  • License number re-issuance
  • Types of license - partnership or joint venture
  • Business names - according to the Office of the Secretary of State, LLC business names have specific requirements and restrictions.

That’s it! Before registering, be sure to get your LLC bonded. For all your LLC surety bond needs, get in touch with Surety Bond Authority Inc.

Check out this Infographic!

"LLC Bonds: Ensuring On-Time Employee Compensation"

LLC Bonds Infographic
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