Small business owners and advocates are rallying around a proposal before the Legislature that would exempt owners of limited liability companies and partnerships from having to buy workers' compensation insurance for themselves, a move that could save thousands of dollars annually in premiums.

Under existing law, all businesses with at least one employee must have worker's compensation insurance, which pays for medical bills, rehabilitation and lost wages should a worker be injured on the job.

While registered corporations are allowed to exempt owners who have more than 50 percent interest in a business, the law does not provide the waiver to owners of limited liability companies, partnerships or sole proprietorships.

The latest figures with the state Department of Commerce and Consumer Affairs showed there are 56,377 Hawai'i corporations registered with the state. More than 33,000 are limited liability companies and 354 are limited liability partnerships. In addition, there are 34,327 sole proprietorships.

The Legislature is considering a bill that includes a proposal that would allow owners of LLCs, LLPs and sole proprietorships to opt out of buying workers' compensation insurance for themselves. They would still have to purchase insurance for their employees.

The House Committee on Labor and Public Employment Thursday approved the measure and sent it to the Finance Committee for further debate.

The proposal has received broad support from the Lingle administration, small business owners and agencies that support small businesses.

The Small Business Caucus, a bipartisan group of legislators, also is supporting the measure. Caucus Co-chair Rep. Gene Ward, R-17th (Hawai'i Kai, Kalama Valley), said he has "high expectations" that the proposal will pass.

"If you are a mom-and-popper it's going to exempt you from having to do workers' comp, which basically now none of these guys actually ever claim so they're paying it for nothing," Ward said. "We want these guys to be able to make more money so they can have more employees and give better wages."

Melissa Pavlicek, Hawai'i director of the National Federation of Independent Business, said the savings for each business will vary depending on the type of business, but she estimated that the exemption will save owners about $1,000 each year.

"It's just a small step, but it would save a lot of companies money and that would benefit our economy," said Pavlicek, who owns an LLC with her husband. "We chose a limited liability corporation so we could save on legal fees and we wouldn't have to do a lot of paper work, and yet we have to buy workers' compensation insurance and that doesn't make much sense."

Opponents of the waiver have said they feared a further watering down of the state's workers' compensation law should this proposal pass. But James Hardway, spokesman for the state Department of Labor, said the measure would "just be an extension of a policy and philosophy that the law already recognizes."

"At most it'll affect one or two people in each corporation set up as an LLP or LLC," Hardway said. "If I own 50 percent or 100 percent of the LLC and I have employees, I am obligated to provide work-comp insurance to my employees."

Labor Committee Chairman Rep. Alex Sonson, D-35th (Pearl City, Waipahu), said he believes the proposal, which his committee added to a larger workers' compensation bill, will survive this session.

"I'm comfortable that we've done a pretty good job in taking care of all the controversial issues in the particular provisions in HB 763," Sonson said.

But Tim Lyons, executive director of the Hawai'i Business League, isn't as optimistic.

"I wish I could be but it has gone even further at other legislative sessions than this and still not made it," Lyons said.

Even if it passes, Lyons said, he doesn't expect every business owner to take advantage of the exemption.

"That person still may want to protect themselves from getting hurt on the job and what do they do for income," he said. "There are certain disability policies that individuals can buy directly that would be cheaper than their workers' comp, but yet it affords them the same, if not better coverage. So if the owner decides he wants to opt out of the worker's comp system, our feeling has always been he should have that choice."

Reach Curtis Lum at culum@honoluluadvertiser.com.