Starting a construction company is a great adventure, especially in these uncertain times. But if you’ve dared to start a business in the construction industry in California, you’ll need some luck, niche knowledge, a good business plan, and initial capital. And if you want to operate by law, you should follow certain guidelines.
Most companies in the construction field are organized as LLCs (limited responsibility companies). On this link, read about the pros and cons of this business structure. In general, it protects the owners’ personal assets and holds the LLC liable for any damage it makes.
The recent law changes order that Californian contractors can form an LLC if they meet the California Contractors State Licensing Board’s (CSLB) conditions. In fact, that’s a series of requirements in order to obtain the contractor’s license.
One part of these conditions concern company responsibility towards other entities – clients, workers, public, but also toward the property. California CSLB obliges construction contractors to follow ethical business practices regarding the stated things. That’s why there are many requirements for different types of surety bonds.
Licensure Requirements for Contractors in California
As said, the law for starting LLCs in California changed last year, so US construction contractors should invest extra effort and money to get an LLC license. This practice should make their business safer and more ethical, but also fair and financially possible to enforce the law in the case of unpredictable situations.
To make that possible, construction companies must obtain $ 1 million general liability insurance, a contractor’s license bond, and an LLC employee bond. The latter is especially important because it contributes a lot to business ethics, and competent institutions specifically require it.
What Is LLC Employee / Worker Bond?
This requirement refers to giving cash deposit of $ 100,000 or buying a surety bond in that amount. You can make this purchase at any insurance company specializing in workers’ bonding. Either way, only after obtaining it can construction LLCs become eligible for the contractor’s license.
Three entities in this process are a principal or surety holder (the contractor), a surety issuer (a chosen insurance company), and an obligee (CSBL). Simply put, with an LLC employee bond, the surety holder provides guarantees to the CSLB that the LLC will pay its employees for their work at the maximum amount of $100,000.
LLC Employee surety bond is something like a contract with an insurance company that protects employees from any damage they may experience if they’re not paid fair wages. If the company they work for fails to fulfill its obligations, it’ll bear the legal consequences. Employees can sue these contractors for unpaid wages plus extra costs that can exceed the value of the bonding contract.
Who Is Eligible for LLC Employee/Worker Bond?
A good credit score is a crucial eligibility requirement for issuing a surety bond. Similar to when applying for loans, the business’s credit score is of great importance, as insurance companies use this parameter to decide whether they’ll be a guarantee for an LLC or not and how much the contractor will pay for that service.
If you decide on bonding employees, you’ll pay a certain fee for this service. Yes, it’s a $100,000 LLC bond, but you don’t pay that amount when purchasing. Instead, you pay only a fraction of that amount, called an annual premium, considering that this bonding contract requires yearly renewal whether activated or not.
How much this premium will be, as said, depends on the company’s credit score. But other factors affect this cost, such as real estate ownership, recent financial reports, previous licenses, etc. In principle, this fee ranges from 1.5 to 10%.
Companies with poor credit scores or bad marks in their credit histories can apply, too. Recent bankruptcies or tax issues aren’t a stumbling block to obtaining this surety bond. You’ll just pay a higher premium for it, as insurance companies need to compensate for their risks somehow. The practice proved that companies with lower credit are more likely to fail to meet bond requirements, but that’s not a rule of thumb.
To know if you’re eligible for this surety bond, you can contact several providers and ask for free quotes. Certainly, it’s of utmost importance to choose a reliable and reputable insurance company that’ll have your back in the event of bond activation.
What Would Happen if the Claim Is Filled?
Any party protected by the surety bond can file a claim against the construction company if it fails to meet its obligations. But this process isn’t simple, and the harmed parties need valid proof to support their claims.
After filing a claim, CSLB must investigate the case to decide whether the basis for the claim is valid. If the LLC is proven guilty, the competent authority determines that it must pay its obligations on the basis of a bonding contract. As said, those debts can be greater than the initial $100,000.
The surety issuer, i.e., the insurance company will settle the requested amounts. Furthermore, it’ll charge the surety holder (LLC) for any additional cost they have paid on their behalf, plus fees. Eventually, if the LLC doesn’t pay its obligations, it can be fined, and the sanctions can be so harsh that CSLB can cancel its license.
Why LLC Employee/Worker Bond Is Important
LLC employee bond is always good to have because you never know when you may need it. Many problems can occur down the road, preventing you from paying your employees. So bonding is like a safety net that’ll protect both your workers and your business and finances.
Holding this bond doesn’t mean it’ll necessarily be activated. In order to avoid this, you have to respect labor laws, adhere to the contracts signed with the workers, and provide fair and timely payments.
Responsible construction contractors in California will go the extra mile to protect their employees. They’ll obtain an LLC worker bond and thus provide peace of mind to all parties covered by this contract.