Employee stock ownership plan s corporation
How an Employee Stock Ownership Plan (ESOP) Works
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Corporations that do not make this election are by default taxed as a C Corporation. S Corporations only can issue one class of stock and can have no more than shareholders. In addition, only individuals, certain trusts ESOPs included , and estates can be shareholders of S Corporations partnerships or corporations cannot be shareholders. S Corporations are considered pass-through entities for federal income tax purposes, meaning that the taxable earnings of the entity are attributed on a pro-rata basis and taxed at the shareholder level.
Companies with this structure often distribute enough of the earnings for the shareholders to cover their tax liability. Since each shareholder may have a different personal tax situation, a distribution level near the top marginal federal and state income tax rates is typical. Where an employee stock ownership plan ESOP is an owner of a corporation, the plan assets are held in trust for the benefit of the plan participants.
As a shareholder of an S Corporation, the ESOP trust considered one shareholder is attributed its proportionate amount of the taxable income of the company. Like any ESOP company, these firms must properly plan for the benefit payments also known as the repurchase liability that need to be made when employees leave or retire from the company.
Depending on the circumstances, the cash flow savings may in fact outweigh the repurchase liability over time. S Corporations with ESOPs also face additional regulatory guidelines Section p designed to ensure that the bulk of the benefit is not going to just a few employees. There are many other considerations and each issue may involve seeking the advice of legal and tax professionals.
Management S Corporation ESOPs: Scam or Opportunity?
There are some S Corporations seeking to attain percent ESOP status, either through a one-time sale or incrementally, in order to take advantage of the tremendous benefit it affords. With all the stock of the company owned by the ESOP, the company no longer needs to make tax distributions and the additional cash flow can enable greater capital investment in new products or facilities. It can allow a company to become more competitive on price in order to gain market share in their industry or perhaps be used for acquisitions.
The possibilities are endless. When structured and maintained properly, the percent ESOP-owned S Corporation can be a powerful force of employee ownership. Programs Rady MBA Full-Time MBA FlexMBA Admissions Admissions Events Curriculum Master of Finance Curriculum Faculty Admissions.
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