A small business's election between operating as an LLC or corporation
can have a significant impact on its requirement to insure against workers'
compensation liability and expose its owners to personal civil and even
criminal liability in the event of an uninsured compensable injury.
The North Carolina Workers' Compensation Act distinguishes between
officers of a corporation, whom the Act deems to be employees*, and members
of an LLC, whom the Act does not deem to be employees**. N. C. Gen. Stat.
§97-2(2) The distinction is important because of the Act's definition
of "employment": "private employment in which three or
more employees are regularly employed in the same business or establishment..."
N. C. Gen. Stat. §97-2(1)
A case recently before the North Carolina Industrial Commission is a good
example of the potential pitfall: Husband and wife open a bed & breakfast
under a corporation they formed. Husband and wife are corporate officers.
Business hires a housekeeper. Housekeeper slips and falls on ice taking
out the trash and fractures her ankle requiring surgical repair with internal
hardware. Business and its owners get hit with an award to pay for costs
of surgery, PT, temporary total, and permanent partial disability. They
also get hit with a penalty award equal to $100/day for each day the business
was without coverage, an additional $26,000. Had that same business entered
this world as an LLC, it and its owners would not have been subject to
the Act, would not have had to secure workers' compensation liability
coverage, would have had no responsibility to the housekeeper for her
injuries under the Act, and would not have been taxed with a penalty for
failing to have coverage.
Bottom line: be aware of the plusses and minuses between life as an LLC
and life as a corporation, particularly in the workers' compensation
context. The small B&B above is pursuing a claim against its insurance
agent for failing to advise the owners of the need to secure workers'
compensation coverage as a corporation. After securing coverage, the B&B's
counsel was able to negotiate the Industrial Commission's penalty
down to $1,200.
* "Every executive officer elected or appointed and empowered in accordance
with the charter and bylaws of a corporation shall be considered as an
employee of such corporation under this Article."
** "Any sole proprietor or partner of a business or any member of
a limited liability company may elect to be included as an employee under
the workers' compensation coverage of such business if he is actively
engaged in the operation of the business and if the insurer is notified
of his election to be so included...."
Allan R. Tarleton is a principal with The Van Winkle Law Firm where he concentrates his
practice in civil litigation in North Carolina's superior courts and
workers' compensation litigation before the North Carolina Industrial Commission, and appeals before the
state's appellate courts.
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