Starting a Business While on Unemployment

Updated February 16, 2023

When most people become unemployed, their first natural step is to start looking for work. However, some look at unemployment as an opportunity to start their own business. This raises questions such as whether it is possible to start a business while unemployed, if you can use unemployment benefits to help start a business or if starting a business while on unemployment benefits is even a good idea. In this article, we answer some frequently asked questions about starting a business while unemployed.

Related: Guide To Unemployment Benefits

Can you start a business while on unemployment?

The short answer is yes, you can start a business while you are on unemployment. Whether or not you are receiving unemployment benefits does not have to factor into your decision whether you find employment somewhere or whether you launch your own company. You will, however, need to research the laws within your own state. Some states have specific programs to help those who have been laid off starting a business. Other states impose restrictions on whether you can receive unemployment checks if you are self-employed or starting an LLC.

Can you use unemployment benefits to help start a business?

As a general rule, no, you are not allowed to use your unemployment benefits, or unemployment insurance money, to bankroll your startup. The money you invest in your new business should be your own money. The purpose of unemployment benefits is to help you buy food and pay bills while you are looking for work. Using that money to invest in a business may be considered improper use of those funds.

Some states have made use of federal law that enables them to set up Self-Employment Assistance (SEA) programs. These programs can provide up to 26 weeks of benefits while you are busy starting your business. Usually, your state would require you to be looking for work during this time to remain eligible for unemployment benefits. If you don't have an SEA program in your state, you can still start a business. You just have to be sure you declare any earnings and follow your state's requirements to continue receiving benefits.

Why should you start a business while on unemployment?

Some reasons why you might consider starting a business while on unemployment include:

Availability of work

Sometimes the economic climate is good and jobs are relatively easy to find. But that's not always the case. When the economic climate is bad, or there are not many jobs available in your field, you may have a difficult time securing employment. You could always re-train in another field, but that can take time and money. An alternative option is to start your own business doing the kind of work that best fits your skills.

Become your own boss

An advantage of starting your own business is that you are your own boss. You can set your own work schedule and do something you enjoy. If you are unemployed, instead of applying to work for someone else, you could start your own business and become self-employed. You can then invest all the time and energy you would put into searching for a job into creating your own business.

Achieve a life ambition

Perhaps you have always wanted to start your own business but you have never had the time to write a business plan, do market research, submit the necessary paperwork and fulfill any other state requirements for launching a business. One advantage of being unemployed is you now have the time to invest in starting your own company. You can use the hours you now have every day to turn something negative into the fulfillment of a life ambition.

Why shouldn't you start a business while on unemployment?

While starting a business can be a rewarding way to use your skills while on unemployment, there are some things you should consider before writing your business plan. These include:

Having money to invest

Since unemployment insurance is supposed to be spent on bills, food and other necessities, unless your state offers an SEA program, you may have to use your own money to start your business. This includes paying the costs for filing the necessary forms as well as startup costs such as equipment, office space and advertising. Also, you have to report any income you make from your business. The government usually deducts this amount from your unemployment benefits.

Finding the time

In order to continue receiving unemployment benefits, many states require that you show evidence you have been actively looking for work. While it is important that you comply with your state's regulations for receiving unemployment benefits, this takes time away from starting a business. You may also need to work a part-time job to fund your new business venture, which again leaves you with less time to spend on your startup.

Being employed while unemployed

It's possible your state may consider the time you spend on your new business to be the same as being employed. Whether or not you are yet earning an income from your new business, the state may regard your business venture as a job. This could make you ineligible to continue receiving unemployment benefits.

Getting resistance

You may find your local unemployment office resistant to the idea of you starting a business while receiving unemployment benefits. Starting a business demands a lot of time which can make you less available to accept work. Being ready and willing to take a job in your skill area is usually one of the requirements for receiving unemployment benefits. Along with the points mentioned above, this could make the unemployment office unwilling to grant you benefits.

What are some tips for starting a business while receiving unemployment benefits?

Here are some tips for you to consider if you plan to start a business while receiving unemployment benefits:

Follow the rules. Make sure you declare your income and comply with whatever is required of you by your state to continue to receive unemployment benefits. You could perhaps talk to someone at your local unemployment office to see if there are ways within the system that you can pursue your business while adhering to the rules.
Manage your time well. You may have to spend time looking for work and doing other non-startup-related tasks in order to keep receiving benefits. Be sure you organize your time well so you are able to keep up with your state's requirements and have time to work on your business.
Consider part-time work. Since you may have to look for work anyway to keep your benefits, consider applying for a part-time job. This may help supplement your income and offset some of the costs of starting your business.
Do your research. Whether you are starting a business using skills you had at your previous job or making a business out of a hobby, be sure you research the industry so you know what you need to do to succeed. If it is an industry that is new to you, consider applying for a job within that industry to get an idea of how it works.