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)

Who qualifies for the section 1042 tax deferral on the sale of stock to an ESOP?

Owners of stock in closely held C corporations who have held that stock for at least three years prior to the sale. Companies that are not C corporations can convert to C status, Ownership will count from the time the seller held stock in the company that converted to C. The ESOP must own 30% of the total value of shares in the company after the sale. Corporations do not qualify for Section 1042, but partnerships, estates, taxable trusts and individual owners do. The shares sold to the ESOP do not qualify if they were acquired as part of an employee benefit plan or through certain types of stock options. Proceeds from the sale must be reinvented in stock and bonds of U.S. public or private operating companies that do not make more than 25% of their income from passive investment.

Many companies are organized as S corporations. If an S corporation converts to C status, it cannot reconvert for five years. Because 100% S ESOPs are not taxable, many companies that are S will convert to C for the sale, then reconvert to S five years later.

For more details, see Selling to an ESOP and Financing the Deal and the ESOP Pre-Feasibility Toolkit.

Link to this FAQ Topic: Tax Benefits to the Seller & Company