Can an LLC Owner File for Unemployment?

Can an LLC Owner File for Unemployment?

If you own an LLC but you’ve been laid off from a full-time job, there are various rules about whether you can collect unemployment benefits. We’ve shared the basics below, but unemployment rules do vary from state to state. It’s always worth checking with your state unemployment agency on whether you can collect unemployment, how to comply with their rules and your status for getting benefits while starting a new business.

General Rules for Collecting Unemployment Benefits

Regardless of whether you own and run an LLC or not, there are still certain criteria you will need to meet before you can think about claiming unemployment benefit.

You Must Have Been an Employee Paid Through Payroll Who Filed a W2

You can only make an unemployment claim if your employer paid you and also paid unemployment tax to the state and federal government. So, if you were paid a regular salary by an employer, that’s the first step toward claiming unemployment benefits.

The Loss of Work Must Not Have Been Your Fault

Typically, you’re only eligible for unemployment if you lost the job through no fault of your own. For example, if your department was downsized and you were laid off, you may be able to collect unemployment. If you were fired for persistent lateness or not meeting the standards of your workplace, that may impact your ability to make a claim.

You Must Be Actively Seeking Work and Able to Accept Employment Consistent With Your Skills and Training

Most states require you to actively be looking for work to provide you with unemployment benefits. This means you should be spending your time updating your resume, looking for positions, applying for roles and attending interviews. If you limit when you can work, unemployment benefits could be reduced or withheld.

Let’s explore how these rules might apply when you’re self-employed and starting an LLC.

You Must Report Self-Employed LLC Income

Any income that you earn from your LLC or elsewhere must be reported to your state unemployment benefit office. This will reduce the amount you can collect as unemployment. Typically, your benefits will be reduced by the same amount as the money you’re earning.

Your New LLC Could Be Viewed as a Job (Whether You Earn Anything or Not)

Filing for and collecting unemployment relies on you actively seeking and being available for work. If you start a new LLC, your state unemployment agency may well see that as you already having a job and not being available to take on other work. Since that contravenes the need to be available for work, they could decide not to pay you benefits.

A Handful of States Allow You to Claim Unemployment While Starting a Business

If you live in New York, New Hampshire, Oregon or Mississippi, you could be in luck. Each of these states has a Self-Employment Assistance program that lets you use unemployment benefits to start a business.

You will typically need to prove that the business will allow you to pay yourself a full-time income, and you may need to take classes in entrepreneurship and business management as well as create a business plan.

In Most Cases, Using or Claiming Unemployment Benefits While Starting an LLC Is Not a Good Idea

Most state unemployment agencies are likely to take a dim view of continuing to pay unemployment while you try to start a new business. This is likely due to your lack of availability to look for other paying work.

Some state unemployment agencies will not be favorable to you using unemployment benefits to fund your new business. Remember, too, that you will need to report any income your new LLC generates, and that the unemployment agency will likely reduce your benefits by that amount.

In some states, the business activities of your new LLC must be different from the business activities of your former employer to allow you to file and claim unemployment.

We strongly recommend contacting your state unemployment agency and speaking to someone about what your options are. Explain to them the situation you’re in, and ask what you need to do to remain compliant with the law so you can continue claiming unemployment benefits. Do not try to “hide” your new business. It’s always best to be open and transparent about your plans, answer questions from your state unemployment agency and comply with their requirements.

Once you’ve clarified your unemployment situation, Incfile is available if you need assistance starting your company. We also have many services available to help you manage your new business and take some of the administrative burden off your shoulders.

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Paul Maplesden

Paul is a freelance writer, small business owner, and British expat exploring the U.S. When he’s not politely apologizing, he enjoys hats, hockey, Earl Grey Tea, mountains, and dogs.
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