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Common Majority Ownership – How It Can Affect Your Workers Comp

Sometimes a man owns more than one business.  If the business is a sole proprietorship, he is 100% owner of all of those businesses.  If the business is a partnership, LLC, or corporation, he owns at least a portion of those businesses.

First, to the man that owns more than one business: congratulations and more power to you.  I applaud those who are able to pull off this feat.

Second, there’s a funny little thing that happens on the workers comp side of things when this man owns more than one business.  It’s caused by the Common Majority Ownership rule.

Common Majority Ownership is the rule that ties different business organizations together – whether they be sole proprietorships, partnerships, LLCs, or corporations (or any other conceivable organization).

What it means is that if Person A owns more than 50% of ABC Corp, and more than 50% of XYZ Corp, both the state of CA and your insurance companies, when it comes to Workers Comp, will treat both companies as one business entity.

Right now you may be asking: what does it mean to “treat both companies as one business entity” for workers comp?

It means that both ABC Corp and XYZ Corp will get the same Experience Modification and that no insurance companies will insure one without insuring the other.

For the “How Does That Work?” type of people (like me), it works like this: every business entity that applies for workers comp insurance with an insurance company must disclose what people own that business entity.  Once it is discovered that a person owns more than 50% of more than one company, the Workers Comp Insurance Rating Bureau will assign them the same bureau numbers, tying them together forever, or until the ownership changes.

In our example above, both ABC Corp and XYZ Corp are owned by the same person.  Let’s call him Art Vandalay.  Art Vandalay owns 51% of both ABC and XYZ.  Mr. Vandalay started ABC when he was a young entrepreneur, and then purchased XYZ later in his illustrious career.  When he applied for workers comp insurance for XYZ, it was discovered that he also owns ABC, and the WCIRB assigned XYZ the same bureau number as ABC.  The two companies are now tied together for workers comp purposes by the Common Majority Ownership rule.  They will now have the same Experience Modification, and no insurance company will insure XYZ unless it also insures ABC.  Having the same Experience Modification can be a good thing or a bad thing.  If one of the companies has a lot of claims, the Experience Modification will be high – for both companies (increased expenses).  If one of the companies has little to no claims, the Experience Modification will be low – for both companies (cost savings!).

This blog is for the small business owner that has little familiarity with Workers Comp, and finds himself angry and confused when he finds this rule applying to him without any explanation.

This blog is to help keep the blood pressure of the emerging business owner down by showing him the rules of the game before he makes a bad decision.

This blog is to help people who are thinking of splitting a single business into smaller businesses in order to get rid of a high Experience Modification.  Your efforts are futile.  It can’t be done!  Common Majority Ownership will rat you out.

So now you know.  Enjoy navigating the business waters.  You’re welcome.

PS – last week I wrote about owning multiple businesses and how the General Liability insurance companies treat it.  It’s a little different than with Workers Comp.  Check it out here.

ELI GILLESPIE

I’m the commercial producer and owner at Gillespie Insurance Services.

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Posted on February 15, 2016 By Eli Gillespie

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