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 S corporation ESOP be used primarily to benefit just one or a few employees?

ESOPs used to benefit just one or a few employees will trigger devastating tax penalties. In the 2001 tax act, Congress made it highly impractical to use an ESOP in an S corporation just to benefit one or a few (usually highly paid) employees.

The anti-abuse rules for S corporations involve a two-part test: the first is to determine who is a "disqualified person" and the second is to determine if such persons are deemed to own at least 50% of the sponsoring company's stock. Failing the test creates massive penalties and makes the ESOP non-qualified, and therefore not an ESOP. The two parts of the test are in another question in this section.

Link to this FAQ Topic: S Corporation ESOPs