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 kind of employer stock must an ESOP own?

Section 409(l) of the Internal Revenue Code says that an ESOP must hold a publicly traded security in the company or, if there is no publicly traded security, either the class of stock that has the highest combination of voting and dividend rights or preferred stock convertible into such stock. The ESOP must be primarily invested in such stock, but there has never been a definition of that term. Most experts think it means at least 50%, but that it can hold less than this for anywhere from one to a few years, depending on whose opinion is being followed. While ESOPs must own the class of shares with the highest combination of voting and dividend rights, this only looks to the common stock, so if the ESOP owns voting common, for instance, and there is also dividend-paying non-voting preferred, this is acceptable.

An LLC taxed as a corporation that has unit shares only qualifies as ESOP provided they all have the same rights as to distributions, dividends, voting rights, and liquidation proceeds (PLR 201538021).

For a detailed description of the rules and uses for ESOPs, see Understanding ESOPs.

Link to this FAQ Topic: ESOP Basics & Feasibility