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Can an LLC Owner Collect Unemployment?

Can an LLC Owner Collect Unemployment

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Around 45% of new businesses fail within the first five years of operation, and a top cause is a lack of financing. Since it’s not uncommon to have money problems, you don’t have to feel as alone in your struggles as an entrepreneur. It also means you should explore all your options before throwing in the towel.

Securing additional funding may not be viable for everyone though, especially if your credit isn’t great. This may have you thinking about claiming unemployment benefits as an avenue.

Can an LLC owner collect unemployment though? Keep reading to find out.

Can an LLC Owner Collect Unemployment?

The answer is “yes,” but also “no.” 

The reality is that there are several factors that impact whether you’re eligible for unemployment. Below are the main ones to consider.

Employment Status

As an LLC owner, you can pay yourself by being an employee. This means that you may get a regular salary or wage that you report on a W-2.

If this is the case, then you’re eligible for unemployment benefits if you lost your job through no fault of your own. For example, if you’re no longer an employee because of a business downturn or closure, then you can apply for benefits.

Keep in mind that this is only possible if you draw a salary. If you receive income through profits or distributions, you generally won’t be eligible since you’re not considered an employee.

Type of LLC Owner

Can a business owner apply for unemployment? Well, if you own the company by yourself, then typically, you aren’t considered an employee. Your label is usually “self-employed,” meaning you don’t pay yourself like you would an employee.

If you own the company with other LLC members, then it’s possible for you to be an employee. This will depend on your LLC’s operating agreement, which outlines the duties of each owner.

To break it down further, your LLC can be either member-managed or manager-managed. Should it be the latter, and you’re a manager, then that’s considered and employee role. This means you can apply for unemployment benefits.

The same goes for if you have a C-level position. In many companies, these roles are treated as employee ones, so if this is the case for your LLC, then again, you can apply for unemployment.

Do note that your eligibility will differ if you’re an active vs. passive LLC member. 

Corporate Structure

Your LLC’s corporate structure matters too.

Can a C-corp owner collect unemployment? Here, the LLC is considered a separate entity from you, which means you can be an employee. Since you’ll receive W-2s, you can collect unemployment.

Can an S-corp owner collect unemployment? Here, if you’re an active LLC member, then you may be considered an employee. So if you receive a salary, then you can apply for unemployment.

State Laws

There’s unemployment insurance, which applies on a federal level. But there’s also a state unemployment tax on top of the 6% federal rate, and employers must pay out both.

If you want to claim unemployment benefits as an employee of your LLC, then your company must take care of the payout. Every state sets its own unemployment tax rate, which then affecfts how big the payout is. This also affects eligibility rules and regulations, so it’s best if you check with your state for more details.

What About Starting an LLC While on Unemployment?

Starting a business is already risky, but starting one while on unemployment is even riskier. Is it even allowed though?

In general, it’s possible to start an LLC while collecting unemployment benefits. In fact, some states have a specific self-employment assistance program for those on unemployment (Delaware, New York, New Hampshire, Oregon, and MIssissippi). However, you need to be very careful when doing so, as it’s easy to break laws while doing so.

For instance, some states have specific guidelines on starting a business while you’re on unemployment. Plus, you’re typically required to report any income you make while collecting these benefits. If you don’t, then there are several serious consequences, scuh as penalties, repayment of benefits, or disqualification from future benefits.

In addition, most states require you to be on an active job search while you’re on unemployment. Make sure you can prove that you’re still fulfilling this requirement while busy starting a company.

Keep in mind that if your LLC generates income, this can affect the amount of unemployment you can receive. Check with your state, as it’ll have the formula to calculate exactly how much your benefits will be reduced, based on your new earnings.

Know Your Rights as an LLC Owner

Now you know the answer to the question, “Can an LLC owner collect unemployment?”

There are many cases in which LLC owners can claim unemployment benefits. Essentially, you have to be an employee with a W-2 to do so. If you’re eligible, you’ll have to file each year to claim again.

In some situations, you can even start an LLC while collecting these benefits. However, you’ll have to carefully check the laws to ensure you’re not breaking any while doing so.

Sign up with Business Anywhere if you’d like to start a new LLC. We’ll take care of all the paperwork, and you’ll be up and running within days.

About Author

Picture of Rick Mak

Rick Mak

Rick Mak is a 30-year veteran businessman, having started, bought, and/or sold more than a dozen companies. He has bachelor's degrees in International Business, Finance, and Economics, with masters in both Entrepreneurship and International Law. He has spoken at hundreds of conferences around the world during his career on entrepreneurship, international tax law, asset protection, and company structure. Business Anywhere Editorial Guidelines

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