Workers’ compensation requirements don’t apply the same way to every business – the rules shift meaningfully based on entity type, whether the business has any employees at all, and in some states, how many owners hold stock in a corporation. Getting this wrong in either direction is costly: carrying coverage nobody required wastes money, and skipping coverage that was actually required exposes the business to real penalties and personal injury lawsuits an insurance policy would have covered.
Sole Proprietors With No Employees Generally Aren’t Required to Carry It
A sole proprietor with no employees is typically not required by state law to carry workers’ compensation insurance, since there’s no one else’s work injury to insure against. That said, sole proprietors can voluntarily buy a policy to cover themselves, and clients in higher-injury-risk fields – construction, roofing, and similar trades – often require proof of coverage before hiring a contractor, regardless of what the state technically mandates.
LLCs Without Employees Usually Follow the Same Rule
Single-member and multi-member LLCs without employees generally aren’t required to carry workers’ comp either, because LLC members and partners aren’t considered “employees” for workers’ comp purposes even though they work in the business – the same logic that exempts a no-employee sole proprietor applies to an LLC’s owner-members. The moment an LLC hires its first actual employee, that exemption ends for that employee’s coverage.
Corporations Have a Narrower Exemption
Many states allow a workers’ comp exemption for a corporation only when it’s owned by one or two people who hold all the stock and also hold all the corporate officer positions – each qualifying owner has to hold at least one share and an actual office (president, secretary, etc.), not just be a passive shareholder. This is a narrower carve-out than the LLC exemption, and it disappears the moment the corporation brings on a third owner or a non-owner employee.
Every Entity With Employees Needs It, Full Stop
Regardless of entity type – sole proprietorship, LLC, S-corp, or C-corp – any business with actual employees is required to carry workers’ compensation coverage for those employees in nearly every state. This requirement is independent of the entity’s liability shield: workers’ comp exists specifically because it replaces an injured employee’s right to sue the employer directly, trading a guaranteed no-fault benefit for giving up that lawsuit right, which is a different kind of protection than what an LLC or corporation’s liability shield provides.
Check the State, Not Just the Entity Type
Exact thresholds and exemption rules vary meaningfully by state – some states count independent contractors toward employee-count thresholds in certain industries, and some require coverage starting at the very first employee with no minimum threshold at all. The entity type sets the general framework, but the actual requirement always has to be checked against the specific state’s workers’ compensation agency before assuming an exemption applies.
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Related reading: Professional Liability Insurance vs. Your Entity’s Liability Shield and EIN and Business Bank Account Setup.
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