Recently a potential client posed a question to our firm regarding what kind of salary he should take for his new business. Although this may sound like a simple question, there are many factors that must be taken into account before constructing a compensation plan for a small business and their owners. The main factor that must be addressed is what type of business entity the business owner has chosen (sole proprietor, partnership, C or S-Corp) and this should be addressed in the planning stages with input from an attorney and accountant.
If the business is organized as a corporation, additional legwork must be done to ensure that the compensation taken by the officers/employees is reasonable. The IRS has recently stepped up their enforcement on corporations that do not provide their officers/employees with a reasonable compensation and it is important for a small business owner to address the following factors when developing a compensation plan:
• The financial condition of the company
• The roles and responsibilities of the company
• The salaries paid to other individuals in similar situations in the market
These are just a few of the factors a small business owner must address when structuring a compensation plan to maintain compliance with the IRS guidelines. Be sure that your compensation plan is outlined and detailed within your corporate information and there will be minimal chance that the IRS adjusts your compensation to what they feel is reasonable.
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