Frequently Asked Questions

Employee Ownership FAQs

Common questions about employee stock ownership plans (ESOPs), employee ownership trusts (EOTs), and other forms of employee ownership, from the basics to technical topics.

This FAQ is written primarily for business owners, managers, and advisors involved in setting up or running an employee ownership plan. If you're an employee at an ESOP company looking to understand your own benefits and rights, see our articles on Working at an ESOP Company and The Rights of ESOP Participants.

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Can an employee get net unrealized appreciation tax treatment on distributions in shares from an S corporation?

There is nothing in the law to prevent this, but it may not be of much value. First, companies may be reluctant to distribute actual shares to employees for fear they will violate the 100 shareholder rule of S corporations, or simply because they don't want shares held outside the company. As an S ESOP, they don't have to provide a stock distribution. Second, in an S corporation, the owner's basis is adjusted upward every time a distribution is made. So when the employee gets the shares, the basis is often very high relative to the value received, thus making most of the distribution subject to ordinary income tax and, possibly, a penalty tax.

Link to this FAQ Topic: S Corporation ESOPs