Questions on Surety Bonds

A surety bond is a legal contract made among three parties: the obligee, the principal, and the surety. This bond is a promise that one party (the principal) makes to pay a second party (the obligee) a specific sum of money if the principal does not meet a particular obligation, like fulfilling a contract. Thus a surety bond is protection for an obligee and will hopefully keep the obligee from incurring losses should the principle be unable to meet a part or all of the obligation. The surety in the contract is the person who assures the obligee that the principal will fulfill his or her duties.

Listed below are a few questions regarding surety bonds answered by the business lawyers.

Can I obtain a Credit Services Organization Surety Bond in California and place the bond directly with the state without taking the help of a surety bond company?

Usually, you are allowed to become self-bonded. You would need to deposit your own funds as required by the state of California. You may want to contact the state and check if they will allow you to place a bond with them. Alternatively, ask if you can place it in an escrow account that is being held by a third party who is authorized to hold it.

I have an LLC business in Indiana and recently discovered that I need to have a surety bond that I can’t afford. If I keep the business going and get sued by customers, the attorney general or the state, will the LLC cover me?

If you are required to have a bond, you cannot operate a legal business without posting it. As it is illegal to continue operating the business willingly and intentionally in the absence of a bond, you cannot be shielded from personal liability through LLC liability protection. If you can’t afford the bond, Indiana does provide another possible option. You could obtain a letter of credit under IC 24-5-15-8, which should allow the AG to waive the requirement.

I recently bought a Medical Marijuana Dispensary and received a Notice of Security Requirements from the California Board of Equalization to deposit $25,000 as security. They said it could be cash, deposit account, or surety bond. What does a surety bond mean?

The notice was probably sent to you because the state had trouble collecting taxes from previous owners so they now want a deposit to ensure that the taxes get paid on time. They probably also assume that, in a dispensary, taxes are not paid on many cash transactions. You could give them a deposit in cash. Or you could get a surety bond. This is a kind of insurance policy on which you pay a premium. This way if taxes are due and you don’t pay them, the state can collect money from the insurance company based on the bond. Since a bond usually costs 10% of the amount bonded, a $25,000 bond would come to $2,500 per year.

My husband and cousin secured a surety bond for their LLC. The bond company then had to pay off a claim against the LLC and is now trying to reclaim the money from the principals and their spouses. The LLC couldn’t pay back the bond company and has now lost its license. Can you explain what the "limited liability" of the principals and the spouses would be?

The operating agreement of the LLC will contain the rights and responsibilities of all parties concerned and will explain the liability as well. In the absence of this kind of agreement, the principals and spouses would be what is known as “jointly and severally liable” for all debts. This means that the bond company can either pursue one member if they think they can get their money back from him/her or they can pursue all the people involved to reclaim their debt.

Every surety bond has a penal sum. This is the maximum sum of money that the surety would need to pay if the principal defaults. This sum also helps the surety to assess the risk involved in giving the bond. In addition, the premium on the bond will also be determined based on this. There are many different kinds of surety bonds available. They include court bonds, bail bonds, contract bonds, license bonds, permit bonds, probate bonds, and public official bonds. Seeking the advice of a legal expert when dealing with surety bonds may be advisable.