Unemployment for Members of LLCs

July 21, 2011

The Wisconsin Builders Association Hot Line is a service provided for the Wisconsin Builders Association by the law firm of Axley Brynelson, LLP. Legal Hot Line Answers should be considered a general statement of applicable legal information. Given this format, it is impossible to fully address all potential legal issues which might apply in any particular situation. A determination of any individual’s legal rights in a transaction can only be obtained after a complete analysis of the law and its applicability to the particular fact situation. Please contact the author of the article if additional information is needed, or private counsel, if legal advice is needed.

Can a shareholder of a corporation or a member of a limited liability company claim unemployment insurance benefits as an employee of the corporation or limited liability company if there is a lack of work? In other words, can a builder’s owner lay himself off and collect unemployment when there is not enough work?

A: In some circumstances, a shareholder or a member of a limited liability company is considered an “employee” for purposes of determining unemployment benefit eligibility. “Employment” includes an individual’s service for an employer organized as a corporation or a limited liability company in which the individual is a principal officer and has a direct or indirect ownership interest except if the employer has no annual payroll for the calendar year preceding an election or has an annual payroll of less than the amount specified under the statute establishing separate solvency contribution rates, and the employer files a notice of election to exclude the service of all of its principal officers who have a direct or indirect substantial ownership interest in the corporation or limited liability company.See Wis. Stat. s. 108.025.

As a general matter, if you are a shareholder in a corporation that has elected to be taxed under either Subchapter C (a C-Corp) or Subchapter S (an S-Corp) of the United States Internal Revenue Code, and you have not filed notice with the Wisconsin Department of Workforce Development electing to exclude the service of the officers and shareholders, then the officers and shareholders that provide employment services for the corporation may be eligible for unemployment insurance benefits. This assumes that the formalities of an employer-employee relationship are maintained between a corporation and its shareholder or officer/employee (for example, the shareholder is paid a salary from which income taxes are withheld and UI tax was paid).

Limited Liability Companies
Generally, a limited liability company with multiple members will be treated as a partnership and a single member limited liability company will be treated as a sole proprietorship. See Wis. Stat. s. 108.068(1). Pursuant to statute, a person that operates a business as a sole proprietorship and persons that operate a business as partnerships are not employees of the businesses for purposes of determining unemployment benefits, and cannot receive unemployment insurance benefits. See Wis. Stat. s. 108.02(d) & (dm). However, a limited liability company that has elected to be treated as a corporation for federal tax purposes shall be treated as a corporation under the Unemployment Insurance Statute. See Wis. Stat. s. 108.068(2). In other words, if your company is a limited liability company, but has elected to be taxed as an S-Corp., then you as a member/employee may be eligible for unemployment insurance benefits in the same manner as a shareholder or officer/employee of a corporation.

There are two other points that a shareholder, officer or member/employee should be aware of regarding such benefits. A shareholder, officer or member/employee that is eligible for benefits is generally limited to ten times the weekly benefit rate, which is less than the general benefits employees would be entitled to under the law. See Wis. Stat. s. 108.04(1)(g). Also, if a corporation ceases to do business, the shareholder, officer or member/employee may not be eligible for benefits because he or she may have voluntarily terminated his or her employment (i.e., if you close your business, you essentially voluntarily quit working).

You can obtain more information from the Wisconsin Department of Workforce Development or by calling 1.800.822.5246.