The key to knowing whether your limited liability company must have workman's compensation insurance lies in understanding laws in the states in which you operate. This might seem -- and often is -- straightforward if your business operates in only one state. However, complying with laws, which vary between states, is often significantly more complicated for LLC businesses operating in multiple locations.
Owner Versus Employee
The goal of workers' comp is to protect employees who suffer job-related illnesses or injuries. Coverage typically includes medical and rehabilitation costs, as well as lost wages. While an LLC that has employees who aren’t also board members generally must carry workman's compensation insurance just like any other business, some states distinguish between and have different compliance requirements for LLC members than for regular employees. This means a basic determining factor is whether your state considers you as an LLC member or an employee. For example, Massachusetts state laws don’t view members of an LLC as bona fide employees. For this reason, Massachusetts doesn’t require LLC businesses to carry workman's comp on its board members.
Exclusions and Allowances
Some states give an LLC the option to cover or exclude some or all LLC members from a workman's comp insurance plan. For example, in New Hampshire, an LLC that has up to three board members and no other employees can -- but doesn’t have to -- have workman's comp insurance. However, if the business grows to include additional board members or hires permanent employees, workman's compensation insurance becomes mandatory. Despite this, New Hampshire laws say the business has the option to exclude up to three board members from the policy.
Doing Business in Multiple States
If you conduct business outside your home state, that state has jurisdiction over workers' compensation requirements. For example, if your home state is Massachusetts, and your LLC expands to include locations in New Hampshire and Maine, each separate location must comply with workman's comp laws that apply in the respective state. Avoid exposing your business to noncompliance penalties -- as well as having to pay any workman's comp claims from business funds -- by checking with the regulatory agencies of each state to make sure you remain current with the applicable rules.
Making Workmans’ Comp Decisions
In states where covering some or all LLC board members under workman's comp insurance is optional, the board must decide on the best option. On the one hand, it might be a good idea in an industry where illness or injury risks are high and LLC board members take part in daily operations. However, if you have the option and risks to board members are low, excluding board LLC members from a workman's comp insurance plan can be a wise financial decision. Regardless of your specific situation, it’s often best to conduct a full risk assessment and consult with an employment attorney before making a final decision.
Based in Green Bay, Wisc., Jackie Lohrey has been writing professionally since 2009. In addition to writing web content and training manuals for small business clients and nonprofit organizations, including ERA Realtors and the Bay Area Humane Society, Lohrey also works as a finance data analyst for a global business outsourcing company.