Although businesses that serve or sell alcohol are often required to purchase liquor bonds, business owners aren’t always familiar with who’s involved with these bonds. If you need a liquor bond but aren’t sure what parties will be involved in the purchase and sale of one, here’s a brief guide to who you’ll be communicating with.
What Parties Are Involved When Liquor Bonds are Sold and Purchased?
The State Your Business Operates In
Liquor bonds are usually required by state law. Thus, the state your business operates in is one of the parties that will be involved when your business acquires a liquor bond. There are likely two ways that the state will be involved.
First, the state will probably set the requirements that your business’ bond must meet. The state will likely have a minimum dollar amount of protection that the bond must provide. There might also be a form that your business or the underwriting insurance company (see below) may have to fill out and send to the state.
Second, the state will likely be named the “obligee” of the bond. The obligee is the party that places an obligation on the principal (see below). If the obligation is not met, the obligee may be financially compensated from the bond.
In the case of these bonds, the obligation is typically to pay sales tax. If your business fails to pay the sales tax it owes, the state will probably be able to collect either the amount owed or the amount of the bond as the obligee of the bond.
Your Business Itself
Your business is the party that actually purchases the liquor bond, so be prepared to pay the whatever the bond costs. In most cases, this is a small percentage of the bond’s total value. The percentage frequently depends on your business’ credit score, but insurance companies in a few states might not check credit scores.
In the bond’s paperwork, your business will probably be listed as the “principal.” The principal is normally the business that actually purchases the bond, and they’re the party that has an obligation to meet. They’re the second party mentioned above.
The Insurance Company Offering the Liquor Bond
The liquor bond will be sold by an insurance company, which might be referred to as the “surety” or “guarantor.” Should your business fail to meet its obligation, it’s ultimately the insurance company that will likely have to pay the state. Thus, the insurance company provides a form of guarantee.
As the party that sells the liquor bond, the insurance company will receive your payment. This is their compensation for assuming the risk that comes with guaranteeing your business’ payment of taxes.
An Independent Insurance Agent Who Knows Liquor Bonds
An independent insurance agent may not be explicitly mentioned in your liquor bond’s paperwork, but having one guide you through the process of purchasing a bond. They’ll be able to answer any questions you have about the obligee, principal and surety, as well as the purchasing process. If you’re curious how long the process takes or how your business’ credit score affects the cost of a bond, an agent will have answers for you.
To start shopping for a liquor bond, contact an independent insurance agent who has helped other businesses in your state secure liquor bonds. An agent who’s helped other businesses will know what requirements your business must meet and how to find the best bond for your business. If they’re independent, they’ll be able to compare bond offerings from multiple insurance companies to make sure you get the best available price on a bond that works for your business.