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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Does an ESOP in an S corporation have to receive its share of earnings distributions paid to other owners?

Yes. S corporations typically make cash distributions of earnings to owners in amounts at least sufficient to enable these owners to pay their taxes. Even though the ESOP does not have to pay taxes on its share of earnings, it must receive a pro rata share of any distributions.

For details on S corporation ESOPs, see S Corporation ESOPs.

NEW Q How can distributions be used in an S corporation ESOP? Answer: Can S corporation distributions be used to buy more shares from owners? S corporation distributions in an ESOP can be used for a variety of purposes. In a less than 100% ESOP, the distributions could go into the trust and then be available at any time to purchase shares from existing owners. Because This is money that effectively would have otherwise been used to pay taxes, the company is essentially buying shares for free. Distributions also commonly are saved and then eventually used to buy back shares from departing employees. Finally, if there are distributions in excess of either of these needs, they provide diversification for plan participants

Answer:

Link to this FAQ Topic: S Corporation ESOPs