Can an LLC Member Collect Unemployment?

If you are a member of a limited liability company and become unemployed, your eligibility for unemployment insurance benefits based on your service to the LLC depends on whether it paid unemployment insurance premiums on your earnings. This, in turn, depends on how the LLC elects to be taxed. Alternately, it's possible for you to operate an LLC and still collect unemployment benefits based on your service to a previous employer, but your eligibility depends on the income you currently receive from your LLC and the amount of time you're required to put into the company.

No Wage, No Unemployment

Generally speaking, IRS regulations prohibit an LLC from paying its members, who are its owners, a regular wage. Instead, the company's profits are distributed to its owner; if there are multiple owners, the LLC is treated as a partnership. Managing members, those who actively manage the company, pay a self-employment tax on their share of profit. The self-employment tax covers Medicare and Social Security payments, but does not include federal unemployment tax. Thus, no unemployment claim can be made against those earnings.

LLC as a Corporation

If an LLC elects to be taxed as a C or an S corporation, it's required to pay its managing members a "reasonable wage" that meets industry standards for the work performed. Besides paying its share of Medicare and Social Security tax on those earnings, the LLC also pays unemployment tax, making the member eligible for unemployment compensation if circumstances warrant.

Unemployment From a Previous Employer

Many people, upon losing a job, start their own companies and organize them as LLCs. They may be eligible for unemployment benefits based on employment before starting the LLC; this depends on both the time commitment required by the LLC and the profit it generates. If the LLC loses money, the member's unemployment benefits are unaffected; once it begins to generate profits, the owner's unemployment benefits are reduced proportionately. In addition, because state laws require you to be actively seeking work and available to work if you're going to collect unemployment benefits, your commitment to the LLC may affect your eligibility. For example, if the LLC is a brick-and-mortar store that that you operate daily, you may be deemed ineligible to receive unemployment benefits.

State Rules Differ

Since unemployment compensation is administered at the state level, rules can differ on allowed levels of income, job search requirements and other eligibility issues. If you start an LLC after becoming unemployed, a state may freeze your unemployment claim until an examiner reviews your particular circumstances. If unemployment compensation is a concern when planning for an LLC, check with the state where you live and where the company operates for any regulations that may impact your concerns.


About the Author

Tom Chmielewski is a longtime journalist with experience in newspapers, magazines, books, e-books and the Internet. With his company TEC Publishing, he has published magazines and an award-winning multimedia e-book, "Celebration at the Sarayi." Chmielewski's design skills include expertise in Adobe Creative Suite's InDesign and Photoshop. He holds a Bachelor of Arts in English from Western Michigan University.