Can Owners of a Company Be Salaried Employees?
- The primary reason for including stock options in executives' compensation packages is that providing ownership interests in the company aligns the executives' personal interests with the interests of the investing public. The opposite can occur, however, when one is considering whether to detach an owner's interest in a company from the profit-sharing model that would otherwise be in place.
- In a partnership, co-owners of a business undertake a business for profit. These owners have a right to a share of the profit. Partners should ensure that they enter contracts to account for their rights and liabilities. Partners' salaries can be subtracted from revenues before profit is determined for the purpose of allocation, or their salaries can be considered advances taken from each partner's share of the total profit. Contracts for partners' salaries should account for the possibility that the total profits available for allocation may be less than those salaries.
- Corporations that are not publicly traded, such as one owned by a family, are managed by the owners. Often such firms choose to distribute profits as salaries to take advantage of a tax deduction for the firm. Nevertheless, it is important to contractually keep the salaried owners in a position to receive a return on their investment. Owners' personal interests in the company can become misaligned from other investors' interests if the owners' ability to get a return on their investment is lost through salary agreements.
- Publicly traded corporations must make information available to investors to comply with securities regulations. There is usually no problem with providing management limited stock offerings, because management has access to the type of information that the Securities and Exchange Commission would want investors to be aware of. Non-managerial employees, however, are more like the broader investing public: They do not tend to have access to the information that securities laws require to be disclosed. For this reason, publicly traded companies must be careful when providing an ownership interest to employees.
- In considering whether to provide an owner with a salary, you should speak with your attorney about agency and contract issues that might arise. If you run a family business, you should get contracts drafted before you distribute your profits through salaries. If you are running a publicly traded business and you would like to give your workers incentives, speak with your attorney about the securities laws involved with issuing shares to non-management employees.