ESOP tax benefits for selling shareholders can be significant and it can take on many forms depending on the seller(s)’ goals.
Tax Benefits For C Corporation Owner
An owner of a C corporation can defer tax on the sale of stock as long as the ESOP buys at least 30% of the company and the seller re-invests the proceeds in U.S. operating company stocks or bonds within 12 months of the sale. That tax deferral becomes permanent for the seller’s estate if the estate holds those replacement investments at the time of the seller’s death.
Indeed, the tax advantages to an ESOP are strong, and depending on how the ESOP is built, the sale can be financed with tax-deductible contributions from the company—unlike any other buyout structure.
Another reason ESOPs are popular with sellers is their flexibility. ESOP design takes many forms, depending on the seller(s)’ goals. ESOPs can create scenarios whereby:
- Sellers looking for liquidity can gradually sell their stake in a company over a period of years.
- Sellers looking to exit the business quickly can sell their shares all at once.
- Sellers looking to remain involved in managing the business can sell minority stakes over a period of years. A well-designed ESOP will even deliver upside potential in cases like this.
All the while, the business is building a stronger foundation for its future because new employee shareholders tend to become more committed to the success of the business. ESOPs remove uncertainty and ensure strategic and leadership continuity, making them a great choice for owners who care deeply about the legacy of the company they built.
ESOP Tax Benefits For Owners, Participants, And Corporations
Wendy Gilligan provides a brief overview.