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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What is meant by "synthetic equity" for purposes of S corporation anti-abuse rules?

Synthetic equity includes any rights to equity, such as phantom stock, stock options, restricted stock, and stock appreciation rights, as well as claims on future resources of the company that could be characterized as equity. This includes any deferred compensation paid out more than 2.5 months after the end of the year in which the service was performed. It also includes equity or equity-like interests in related companies. These awards have to be valued to attach a present value calculation to the award that can be measured in terms of equity interests.

The counting of synthetic equity interests is a complicated matter, with multiple variations depending on the scenario involved. Regulations concerning this issue take up several pages. Before issuing synthetic equity in any form, be sure to discuss the matter carefully with your advisors.

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

Link to this FAQ Topic: S Corporation ESOPs