How to Get a Dealership License in Texas
Key takeaways: Dealership License in Texas
Understanding the Licensing Process: To legally operate as a dealer in Texas, you must complete a seven-step process that includes taking a dealer educational course, securing a business building, obtaining an EIN, registering your business name, posting a dealer surety bond, submitting an application through eLICENSING, and maintaining proper business hours and records. If you need help with getting your insurance for your dealership or garage use our quote comparison tool to shop multiple quotes in your area!
Financial Commitments and Insurance: When securing a dealer’s license, you’ll also need appropriate insurance coverage. Be aware of the minimum earned premium, which guarantees that insurers retain a portion of your policy’s premium if you cancel early. This can result in additional costs, even after cancellation.
Long-Term Compliance and Record-Keeping: After obtaining your dealer license, maintaining state-required business hours and accurate records of vehicle transactions is essential. Keeping thorough documentation ensures compliance with Texas laws and can prevent operational setbacks.
7 Steps to Obtaining a Dealership License in Texas
If you’re looking to become a licensed dealer in Texas, you’ll need to follow these seven essential steps. These steps ensure that your business is compliant with state laws and regulations and can operate legally. It’s crucial to understand not only the licensing process but also the financial commitments, such as the minimum earned premium on your insurance policy, which can come into play if you decide to cancel after receiving your dealer’s license. If you need help with getting your insurance for your dealership or garage use our quote comparison tool to shop multiple quotes in your area!
1. Complete a Dealer Educational Course
Most new applicants for a Texas Dealer License or General Distinguishing Number (GDN) are required to complete a six-hour web-based dealer educational course. The course covers important aspects of dealership operations and Texas-specific laws. Upon completion, you’ll receive a certificate that must be included with your license application.
2. Secure a Business Building with a Sign and Display Lot
A dealership must have a physical place of business that complies with local zoning laws. This includes a designated office space and a display lot capable of showcasing at least five vehicles. Retail dealers and wholesale dealers cannot share a building, and both must have proper signage visible to the public.
3. Obtain an Employer Identification Number (EIN)
Before submitting your license application, you’ll need an EIN for tax purposes. You can quickly apply for one online, and it will identify your business for tax filings. This is a critical step before moving forward with your application submission.
4. Register Your Business Name
Your dealership’s business name must be registered with the Texas Secretary of State or with the county where your business will operate. This ensures that your dealership is recognized as a legitimate business entity.
5. Secure a Dealer Surety Bond
To obtain a Texas Used Motor Vehicle Dealer License, most dealers must post a $50,000 surety bond. With good credit, this can cost between $200 and $350 annually. Dealers with lower credit scores may face higher bond costs.
6. Submit Your Application via eLICENSING
Your dealer license application must be submitted through the Texas Department of Motor Vehicles’ eLICENSING system. This online process ensures efficient submission and processing. Mistakes in your application can delay approval, so attention to detail is crucial.
7. Maintain Business Hours and Records
Dealers must adhere to specific operating hours based on their business type. Retail dealers are required to be open at least four days a week for four consecutive hours, while wholesale dealers need to be open at least two days per week. You must also keep meticulous records of all vehicle transactions for at least 48 months.
Understanding Minimum Earned Premium in Business Insurance
When purchasing business insurance, one of the terms you’ll often encounter is the minimum earned premium. This provision can play a significant role if you decide to cancel your insurance policy before the end of the term. In this article, we’ll break down what a minimum earned premium is, its purpose, and why it matters when managing your business insurance.
Texas Dealership Insurance Requirements
The State of Texas requires all dealerships to maintain a two (2) Surety Bond, also known as a Dealer Bond, and Garage Liability Insurance in the amount of $85,000 Combined Single Limit.
What is Garage Liability Insurance? The standard policy is designed to cover bodily injury and/or property damage that arises from a covered claim, such as a car accident from a test drive. The garage liability policy is split into two (2) basic coverages, Auto and Other than Auto.
What Is a Minimum Earned Premium?
At its core, a minimum earned premium is the least amount of money an insurer will retain for providing a policy, even if you decide to cancel it before the end of the term. It ensures that the insurance company recoups a portion of the costs involved in underwriting and issuing the policy.
For example, if your annual premium is $1,200 and your policy has a 25% minimum earned premium, you’re required to pay at least $300, even if you cancel early. This protects insurers from absorbing costs without collecting enough premium to cover their expenses.
How to Calculate a Minimum Earned Premium
The exact amount of the minimum earned premium depends on the terms of your policy. Typically, it is expressed as a percentage of the total premium. For instance, if your policy has an annual premium of $1,200 and a 50% minimum earned premium, the insurer is entitled to at least $600, regardless of how long you keep the policy.
Here’s how it works in practice:
- If you cancel after three months and have paid $300, you’ll still owe $300 to meet the $600 minimum.
- If you cancel after six months and have paid $600, you’ve fulfilled your obligation with no refund.
- If you cancel after nine months and have paid $900, you may be eligible for a refund of $300.
What Is the Purpose of a Minimum Earned Premium?
Insurance companies incur significant costs when underwriting a new policy, including administrative expenses and the risk associated with offering coverage. The minimum earned premium helps cover these expenses, ensuring the insurer doesn’t lose money if a policyholder cancels early. It also discourages short-term policy purchases solely for short-term needs.
Another key purpose of the minimum earned premium is to prevent bad faith cancellations. Without this safeguard, some customers might purchase an annual policy to address a short-term need—only to cancel it after a few months, leaving the insurer on the hook for potential claims without having collected a sufficient premium.
Example: A Garage Shop/Dealer Cancels After Obtaining a Dealer’s License
Consider a small auto dealership or garage shop that needs to secure a dealer’s license to legally sell or repair vehicles. To meet the state’s regulatory requirements, the shop must provide proof of insurance by obtaining a Certificate of Insurance (COI). The business purchases a commercial auto insurance policy with an annual premium of $17,000 and a 25% minimum earned premium to satisfy this requirement.
After submitting the COI to the appropriate state department and successfully obtaining the dealer’s license, the shop owner decides to cancel the policy after only two months of coverage, thinking they no longer need it. At this point, they’ve only paid $2,833.33 of the total annual premium, expecting to cancel the policy without any further costs.
However, because the policy has a 25% minimum earned premium, the insurance company is entitled to 25% of the total premium—$4,250. As a result, the shop owner still owes an additional $1,416.67 to cover the minimum earned premium.
This scenario demonstrates how businesses that cancel their insurance after securing a necessary document, like a dealer’s license, are still obligated to pay the minimum earned premium. It serves as a reminder that purchasing insurance solely to obtain paperwork can lead to unexpected costs, even when coverage is canceled early.
The Downsides of a Minimum Earned Premium
From the policyholder’s perspective, a minimum earned premium can make it more expensive to cancel a policy. If a business owner faces changes, such as downsizing or temporarily closing, the obligation to meet the minimum earned premium can complicate cancellation plans.
Additionally, high minimum earned premiums may make businesses hesitant to cancel, even when coverage is no longer needed. It’s essential to understand the details of your policy and whether you can adjust or pause coverage instead of canceling outright. If you need help with getting your insurance for your dealership or garage use our quote comparison tool to shop multiple quotes in your area!
FAQ’s Dealership license In Texas
What are the requirements to obtain a dealership license in Texas?
To obtain a Texas Dealership License, you must complete a dealer educational course, secure a business location with a display lot, obtain an EIN, register your business name, post a $50,000 dealer surety bond, submit your application through the eLICENSING system, and maintain proper business hours and records.
What is a minimum earned premium, and how does it affect dealership insurance?
A minimum earned premium is the portion of your insurance premium that the insurer retains if you cancel your policy early. Even if you cancel your dealership insurance after receiving a certificate of insurance, you may still owe part of the premium depending on the minimum earned percentage.
What kind of business records do Texas dealerships need to maintain?
Texas dealerships must keep detailed records of all vehicle transactions, including purchases, leases, and sales, for at least 48 months. This ensures compliance with state laws and helps avoid penalties during audits. Dealers must maintain a 50,000 surety bond, and garage liability of at least $85,000 Combined Single Limit. If you need help with getting your insurance for your dealership or garage use our quote comparison tool to shop multiple quotes in your area!
