Texas is among America’s best places to do business. From energy to logistics, to entertainment and tourism, many critical economic sectors thrive in the Lone Star State. To operate a successful business in Texas, business owners will need to make sure they’re in compliance with state standards, including relevant license and permit standards issued by state agencies such as the Texas Department of Licensing and Regulation.
Often, this will include submitting an appropriate Texas surety bond when you apply for a business license to guarantee your business’s obligations to its customers and to the Texas government. In this article, we’ll talk about how to get a surety bond in Texas, as well as some of the most popular types of Texas surety bonds. To start, let’s establish the key principles of what a surety bond is.
Basics of Surety Bonds
First, let’s establish the answer to a key question: What is a surety bond? Basically, it’s a legally binding three-party contract that guarantees one party’s performance or payment of an obligation to another party. There are special terms for each of the parties to the surety bond agreement. They are:
- Principal
- The party required to obtain a surety bond (usually a business or individual)
- Obligee
- The party that requires the principal to obtain a surety bond (usually a government agency)
- Surety
- The neutral third party that provides the financial guarantee (usually an insurance company or specialized surety company)
When an obligee believes that a principal has broken the law or violated their professional ethics, they can file a surety bond claim against the principal’s bond for redress. The principal is responsible for paying back any money that the surety pays to the obligee for a valid claim. For an in-depth explanation of how surety bonds work, see our article on understanding the three-party agreement of surety bonds.
Texas Surety Bond Process
The bonding process for a Texas surety bond works similarly to most other states. The key steps for how to get a surety bond in Texas are as follows:
- Determine which type of surety bond your business needs to apply for.
- Find a surety company or surety bond broker that offers that type of bond and apply for a surety bond quote. The surety may ask you for some basic information about your personal and financial history.
- The surety will perform an underwriting process (much as an insurance company does) to determine your perceived risk level based on factors such as credit score and financial history.
- The surety will send you a quote for a premium. You’ll have the option to either pay the premium or apply for a quote from another surety.
Many people find that the easiest way to get an affordable surety bond is to work with a surety bond broker with access to hundreds of different sureties, including sureties that specialize in bonding principals with bad credit. Next, we’ll examine some of the most common surety bonds in Texas and how to get them.
Common Surety Bonds in Texas
Here are a few of the most common. In addition to these common surety bonds for businesses, many consumers will be required to apply for a Texas Bonded Title if the title to a vehicle has been lost or damaged.
1. Texas Sales Tax Bond
Any business in Texas required to collect sales tax on items they sell will also need to present a Texas sales tax bond (also known as a continuous bond of seller) when the business applies for a Texas business license. A sales tax bond guarantees that the business will pay all owed taxes to the Texas Comptroller of Public Accounts on time, including fees, penalties, and interest.
2. Texas Notary Bond
A Texas notary public is a person who has received a government permit allowing them to act as a legally binding witness for certain business transactions and legal procedures. People use notary services for many different purposes such as transferring vehicle titles, giving sworn statements, and creating wills and trusts. A notary bond guarantees that a notary will obey all relevant laws and rules of the notary profession, such as always requiring a valid ID from people signing documents. For a notary to apply for their notary permit from the state of Texas, the applicant must submit a valid notary surety bond with a coverage amount of $10,000.
3. Texas Contractor License Surety Bonds
A contractor license surety bond guarantees a contractor’s obligations to its clients. These surety bonds protect clients by guaranteeing that contractors will complete projects, perform work to a high standard, obey building codes, and pay their subcontractors in full.
Unlike many other states, Texas doesn’t have any statewide requirement for contractor license bonds. However, many individual municipalities in Texas, including several major cities, require contractors to be licensed and bonded before the municipality will issue a permit. During such a permit process, a contractor will also often need to provide proof of insurance and other credentials when they apply. Some cities and counties base their surety bond requirements on a contractor’s credit score and other financial data.
In the absence of a statewide license bond requirement to apply for a contractor’s permit, many Texas contractors elect to purchase a Business Service Bond to provide customers with a similar level of re-assurance that the contractor operates an ethical business. Business Service bonds are commonly purchased by contractors specializing in home improvement, appliance repair, handy, landscaping, pool repair, and many other trades performed on a customer’s property.