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.

NCEO employee ownership FAQ hero (keyboard)

What are the differences in tax benefits available to an S corporation ESOP and a C corporation ESOP?

ESOPs in S corporations would not qualify the seller for deferral of taxation on the gains made from the sale to a 30% or more ESOP (the so called "1042 rollover") available in C corporation ESOPs. Nor would S corporation ESOPs be allowed to deduct dividends paid on ESOP shares or ignore interest payments in calculating the limit on contributions to repay an ESOP loan, as in a C corporation ESOP. Moreover, unlike in a C corporation ESOP, interest payments on an ESOP loan and forfeited shares recontributed to the ESOP would count towards the contribution limits. In practical terms, there are ways to structure an ESOP loan so that the contribution limits are not an issue, however.

Profits attributable to the ESOP trust are not taxable. That means that if the ESOP owns 30% of the shares, 30% of the profits are not taxable. If the ESOP owns 100% of the shares, all of the profits are not taxable. If the company makes distributions to non-ESOP owners, the ESOP must still get a pro-rata share of these distributions. The ESOP trust can retain these distributions to fund the future repurchase obligation of the company and or use the money to purchase additional shares from existing owners.

For details on S Corporation ESOPs, see our book S Corporation ESOPs.

.

Link to this FAQ Topic: S Corporation ESOPs