Can LLC Owners Collect Unemployment?

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White business man sitting at a desk filing an unemployment claim, wondering "can LLC owners collect unemployment?"

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Estimated reading time: 5 minutes

Can business owners file for unemployment? This is an unfortunate question to have to ask, but the reality is that not every LLC survives. This has always been a concern for small business owners, but the coronavirus pandemic brought this reality into sharp focus.

2020 forced many self-employed and business owners to scramble to keep their business afloat, and if that failed, to seek LLC unemployment compensation. So, can LLC owners collect unemployment?

In this blog post we’ll not only answer the question “Can I collect unemployment insurance benefits if I own an LLC”, we’ll show you how you can collect unemployment while starting a business.

Let’s get started!

How does the IRS view LLCs?

Before we can answer the question, “Can LLC owners collect unemployment?”, we must first understand how exactly an LLC is treated by the IRS. The IRS treats an LLC in one of two ways.

Multi-member LLC

If there’s more than one member/owner (otherwise known as a multimember LLC), the IRS treats it as a partnership.

Single-member LLC

If there’s only one member/owner, the IRS treats it as a sole proprietorship. In both scenarios, the company’s entire profit is attributed to the members.

Members who actively manage the LLC, pay a self-employment tax on their share of profit (whether it’s distributed or not). This self-employment income tax covers a range of things like Medicare and social security payments but does not include unemployment tax for the federal government. This is because LLC members/owners are not considered employees.

Tax advantage of an LLC

What makes an LLC such a great business type is that it has the flexibility to elect to be taxed as a C or S corporation. What does this mean? It means that if you make such an election, the IRS views you as an employee and requires you be paid a “reasonable wage”.

So, in this situation, in addition to the self-employment tax covering Medicare and Social Security payments, it also covers unemployment compensation.

Now let’s move on to the question of the hour, “Can LLC owners collect unemployment benefits?”

Can a business owner collect unemployment benefits?

We said a lot of things in the previous section, but the question still remains…is a business owner eligible to collect unemployment benefits or not? The answer is yes and no.

If you haven’t elected your LLC to be taxed as an S corp or a C corporation, then the self-employment tax does not cover federal unemployment insurance. This leaves you unable to file a claim should you ever leave a company.

On the flipside, if you have elected your limited liability company to be taxed as a C or S corporation, the self-employment tax does cover federal unemployment insurance benefits, you’re seen as an actual employee. This means that if you should leave the company, or can no longer manage it, you’re eligible for unemployment compensation.

Can I collect unemployment while starting my own business?

COVID and the ensuing pandemic didn’t just force business owners to shut their doors, it forced employers to lay off employees too. And it’s not uncommon for people who lose their job to start their own company. After all, owning an LLC comes with perks, the biggest being autonomy…the ability to be your own boss.

But a similar question looms over the heads of unemployed people too…can you collect unemployment benefits while running an limited liability company? The answer depends on two things:

  • How much money you earn from the LLC
  • And how much time you commit to the company

Regarding the first stipulation, until you’re LLC begins to turn a profit, you can still receive your full amount of unemployment insurance benefits. But once you begin turning a profit, the level of profit will reduce how much money you receive in unemployment benefits.

As for the next point (your time commitment to the company), some states require you to be available for part-time or full-time work to continue receiving unemployment. They may even ask for evidence that you’ve been looking for work.

So, if you work on your LLC part-time, you haven’t turned a profit, and you submit proof of your  job search…you’re still eligible. But if you start a business that requires a full-time commitment, you will most likely lose your unemployment compensation.

Unemployment Rules differ from state to state

Depending on the state you’re in, the answer to the question, “Can you get unemployment insurance if you own your own business or are starting your business?” may differ a little from what we’ve said here.  

This is because unemployment is administered at the state level. State rules on unemployment compensation can differ on allowed levels of income, job search requirements, and more.

So, if you want to know if a business owner can collect unemployment, check with the state where you live, and where the company operates. That way you’ll know of any requirements that may impact your unemployment compensation.

In conclusion

Can you own an LLC and collect unemployment? Yes, but it would be best to contact your state unemployment agency and see what your options are, so you can get the help you need to support your next career move.

Incorporating is the most powerful thing you can do to legitimize your startup. And at IncAuthority.com, our setup LLC services are 100% free. Always. So, don’t wait. Form your new LLC today and enjoy the protection due to you and your business under the law.

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