owner payroll priority when selling a business

Hi Mike,

Thanks for the question. The priority of owner payroll depends largely on what kind of business you have (e.g. LLC, LLP, S-Corp, C-Corp) and the terms of your partnership-, operating-, or employment agreement.

If you have an LLC, for example, the IRS doesn’t recognize the right of owners to pay themselves a salary. Instead, any payments to company owners (except for guaranteed payments that are used to reimburse owners for capital or services) are viewed as draws against company profits. Unless there’s a specific agreement with a manager that entitles them to certain payments, they really don’t have a right to collect any payroll.

If your company is an S-Corp, on the other hand, the IRS recognizes the right of owners to collect a salary from the company. If an owner is owed payroll that has been deferred or delayed, that would probably be viewed as a priority debt of the business, meaning it should be paid before any other creditors or shareholders are paid.

The place to start when getting an answer to your question is probably by reviewing any partnership or employment agreements. If you’re looking for more information on partnership agreements (so you know what to look for) we have a great article on How to Create a Business Partnership Agreement that may help. You can find it here: https://fitsmallbusiness.com/business-partnership-agreement/

We also have an article on employment agreements that you may also find helpful. Though it may not answer your question this time around, it may be helpful to use in your next business. You can find that article (along with a free template) here: https://fitsmallbusiness.com/employment-contract-template/

Hope this helps,
Dock