Small businesses form the backbone of the American economy. Millions of people very year start their own business. When forming a business, a founder has a wide variety of choices concerning the type of business organization. A business can be a sole proprietorship, a limited liability corporation, a limited partnership, or even a hybrid of more than one of these types. There are benefits and drawbacks to each type of business structure. If you are thinking of choosing a corporation as the structure for your business, you need to understand how workers’ compensation interacts with the rules for corporation formation.
One thing that business owners in California need to understand is that almost all employers are required to carry workers’ compensation insurance pursuant to California labor code 3700. Failure to carry the required insurance can result in severe civil and even criminal penalties for the business owners. Corporations are not exempt from this requirement. Forming a business as a corporation can provide important shelters from liability as well as tax advantages, but these advantages do not include de facto exclusion from the requirement to carry workers’ compensation insurance.
Moreover, some relatively recent changes to the California labor code provides that executive officers and directors of corporations must be included in the workers’ compensation insurance coverage. The exception to this is if the corporation is fully owned by the directors and officers. If that is the case, the directors and officers may elect to be excluded from workers’ compensation coverage and benefits. For this to apply the person must be a sole shareholder who is an officer or director of a private corporation. In that case, that person is excluded from the legal definition of “employee.” Any director or officer wishing to opt out will have to fill out specific paperwork to accomplish this. The document is executed under the penalty of perjury, and states that he or she meets the qualifications under the California labor code for being exempt from the insurance requirements. For officers or members of the board of directors of a cooperative corporation and for owners of a professional corporation, there are additional waiver requirements that must be met.
.We have extensive experience helping our clients understand their rights and responsibilities with regard to California’s workers’ compensation insurance requirements. Call us today for a consultation.