The Impact of Reasonable Compensation on Business Valuations
Why should a closely held business be concerned with owners' compensation? It's because the owner compensation package may be scrutinized. Examples might include buy-sell situations, estate and gift tax valuations or litigation proceedings, such as shareholder disputes and divorce. These issues might even come into play with business succession planning, write Sheri Fiske Schultz and Katie Gilden.
June 15, 2017 at 11:52 AM
8 minute read
Why should a closely held business be concerned with owners' compensation? It's because the owner compensation package may be scrutinized. Examples might include buy-sell situations, estate and gift tax valuations or litigation proceedings, such as shareholder disputes and divorce. These issues might even come into play with business succession planning.
Some owners treat the company's bank account like a personal slush fund. Conversely, other owners draw minimal salaries because they undervalue themselves or because the business is cash poor. When it comes to business valuations, the higher an owner's compensation, the lower the company's value will be—unless an adjustment is made.
But what is a reasonable compensation package for an owner who is paying himself or herself? Does the dollar figure attached to reasonable compensation exist only in the mind of that owner? No, in fact, the IRS says there is a science to it. A recent IRS guide to executive compensation can help proprietors determine an appropriate salary for themselves. This can help avoid IRS audits and substantiate an owner's compensation.
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