S Corp Compensation - Base and Earnings

Discussion in 'Growing and Managing a Business' started by poleary2000, May 8, 2015.

  1. poleary2000

    uix_expand uix_collapse
    New Member

    May 8, 2015
    Likes Received:
    Hi there, first time poster. I hope I can explain this well.

    I'm an owner in a small business. I was recently promoted and granted additional share of the business in terms of ownership percentage. However, the larger share owners now wants to modify all of our base salaries because they don't like the potential hit he will take. We are an S corp and pay ourselves a base salary that is pretty reflective of market value for our positions.

    All numbers are fictions, but to explain how the situation was working.

    Two larger owners previous base = $50,000
    Two smaller owners previous base = $40,000​

    A larger owner has 3x the shares at a smaller owner. Thus, assuming a profit of $200k, the final year compensation would be:

    Majority larger = $50,000 + $75,000 = $115,000
    Minority smaller = $40,000 + $25,000 = $ 65,000​

    The shared were adjusted such that the larger owners now have only 2x the shares of the smaller owners. As you can see, that will cut into the larger owners overall compensation. Thus, the new compensation would be:

    Larger owner = $50,000 + $66,667 = $116,667
    Smaller owner = $40,000 + $33,333 = $ 73,333​

    So, the larger owners don't like that and want to change the base. Essentially, they want the he multiplier to always be 2x no matter what the category. The reasoning they say is that they've been taking less money all along than they should have. They want:

    Larger owner = $80,000 + $46,667 = $126,667
    Smaller owner = $40,000 + $23,333 = $63,333​

    Because their bases would be larger, the profit in this example would only be $140,000 instead of $200,000.

    So...my question is...how are base salaries and / or comp typically handled between partners? Honestly, I don't care what the answer is...I just want to better understand. The larger owners are basically saying -- look, for the past few years, we've been taking less than we should have. Now, we feel it's time to set this all straight and base everything off of ownership percentage. I was looking at it saying that the base should be reflective of market rates, not the ownership % and the ownership % would come into play after a reasonable base is paid for all members.

    It's a complicated thing, and as with all situations regarding money, there could be hurt feelings. I just really want to know whether I am looking at it the wrong way.

Share This Page