Owner's "salary" comes in contractor "professional fees"

searcher profile

June 12, 2024

by a searcher in Costa Mesa, CA, USA

Business A is being run as a "lifestyle" business and the owner/CEO is not on the payroll, but instead has been using another entity he owns (Biz B) to charge "professional services" to Biz A.

Is this common?

Given this practice, are there other things common with this type of operator I need to look out for that wouldn't be obvious in the financials?

I'm assuming that his gigantic fees ($500k on $2M Rev) have had the benefit of avoiding Biz A from paying income taxes on his "services".

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commentor profile
Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
Great question. We see this fairly often where a seller is paying a portion if not all of their salary through some sort of other legal entity, usually for some sort of tax benefit. They usually pay it as a management fee or consulting fee. Usually it can still be used as an add-back. However, you will need to be able to prove that it is a true add-back and the other company they are paying it to is not really providing a service to the business. The easiest way to verify this is to get tax returns for the entity they are paying it to and verify there are not other business expenses being paid from that company. If there are, then you cannot add back everything getting paid through to that company. Hopefully they do not have other business running through that company, as that can make it complicated and hard for a lender to really discern if it is an add-back or a true expense. If you need assistance we would be happy to review the transaction and see how we can help. You can reach me here or directly at redacted Good luck with this one.
commentor profile
Reply by a searcher
from University of Michigan in Bay City, MI, USA
^redacted‌ - Interesting take. Are you saying this is "wrong" as in, "get audited and punished" wrong, or just philosophically wrong?

It doesn't seem like there's anything wrong with having a management company provide management services in and of itself, nor does it seem like there is anything wrong with paying the owner greater than market salary. I know the latter at least used to be more scrutinized for C-corps, but don't the new tax rates make it almost a wash?

Is your concern only for buying shares of a C-corp, or are there other scenarios where there is a risk?
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