OUR THOUGHTS ON:

Owner Compensation and Business Valuation

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For various reasons, S Corporations sometimes will pass through earnings to owners, rather than distributing the earnings as wages. Investors many times purchase a company based on some estimate of the expected normalized earnings of the business. One of the key normalization adjustments used to determine the fair market value (“FMV”) for an S corporation is an adjustment for reasonable compensation. When the fair market compensation rate is determined, earnings are affected by the salary adjustment, and a better reflection of the business’s earnings potential to a hypothetical investor can be developed.

Normalization adjustments, including compensation adjustments, should be considered in valuing closely held businesses of all entity structures, but especially for S Corporations.

Schneider Downs has significant experience in determining the FMV of entities. In addition, we have tools to assist in determining market compensation adjustments.

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

© 2018 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

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