In this paper, design aspects of various passive components and switching dynamics of a voltage source inverter (VSI) for compensating unbalanced and nonlinear load are presented. The design method for VSI to track desired reference currents smoothly, is illustrated. By using the proposed method, it is possible to design the passive components of different VSI topologies used for load compensation. The results are supported by detailed simulation studies on a three-phase four-wire compensated system using PSCAD 4.2.1. The design steps are also verified by conducting experiments using a prototype model developed in the laboratory. © 2009 IEEE.