Where the majority controls both employment and distributions, compensation becomes the mechanism through which earnings are captured.

The pattern. Distributions are suspended or minimized; the majority owner’s salary and bonus rise; the minority, no longer employed, receives nothing while the business prospers.

Analysis. Compensation to a controlling owner is a conflicted transaction. Courts examine whether it is reasonable for the services actually performed, using comparable market data, the individual’s role and hours, the company’s performance, and the historical relationship between compensation and earnings.

Evidence. Compensation surveys for the role, industry and company size; the company’s own historical practice; and the timing of increases relative to the dispute.

Related items. Personal expenses paid by the company, above-market rent to an entity the majority owns, family members on the payroll, and loans that are never repaid.

Remedy. Damages measured by the excess, a distribution order, or an adjustment in the buyout valuation — normalizing compensation to market is a standard adjustment in valuing the company.

Tax interaction. Excessive compensation may also be recharacterized for tax purposes, which is an argument the minority can use and the majority should consider before it is made.