FORBES.com: Unemployment For Busted Entrepreneurs

If your business goes belly up, you might be entitled to some government funds.

Pink-slippers applying for unemployment insurance can hope to receive 30% to 60% of their salary from the past 12 to 18 months (up to their state’s maximum allowance), and can collect that money for up to 26 weeks. But what about the safety net for busted small-business owners?

While each state runs its own unemployment benefit program (each with its own requirements and compensation schemes), there is one general rule of thumb for hard-luck entrepreneurs captured by July’s unemployment figures, released Friday: If you pay unemployment taxes on your salary, and you’re ready and able to work, you are likely eligible to collect unemployment insurance.

In sole proprietorships and partnerships, owners may not draw a salary–some choose to cover living expenses out of whatever earnings their companies manage to generate.

Here’s why. A business owner might choose to pay herself a salary to avoid paying stiff self-employment taxes on the company’s profits. Or, she might prefer to eat that self-employment tax, for two reasons: 1) to avoid hiring a payroll service (necessary to prove to the IRS that she paid herself as an employee) and 2) to avoid the hassle of having to file the 940 and 941 tax forms as an employer of herself. (As it happens, in either case she’d come out nearly the same, says Michael Mandale, a Philadelphia-based tax attorney.)

Owners who choose to pay themselves a salary can opt into their state’s unemployment insurance program. Shareholders (or “members”) of S corporations and Limited Liability Companies take home regular salaries, and therefore are deemed employees with access to unemployment insurance.

One catch: Even if you’ve been paying unemployment taxes, you could still be denied unemployment insurance if the state thinks you’re just, well, temporarily loafing.

Say you own a barber shop that’s structured as an S corporation. Business is slow (the recession is postponing customers’ regular trims), and you figure it’s better to close up shop for a few months while the economy turns around. Even if you’ve been paying into the system, you might not be eligible to collect unemployment insurance.

“Your state’s unemployment office has to believe that you are available to work and actually looking for a job,” says Mathew Paulose, an employment lawyer with Manhattan-based Koehler Isaacs. You might also be asked to prove that your business did not have the funds to stay open–meaning that you can’t just quit or retire and start collecting unemployment benefits.

For more information about your state’s unemployment benefit program, visit the Department of Labor’s State Unemployment Tax Information and Assistance Web site.

Via Melanie Linder