11
S P O N S O R S H I P
Understanding ESOPs (Part 2)
For S-corps and C-corps, ESOPs offer different, but significant, tax benefits to both the selling shareholder and the surviving company.
T his article is a sequel to an earlier piece, “Understanding ESOPs (Part 1),” where we discussed the more intangible side of ESOPs, including culture, recruitment, and legacy. This follow up article will deliver clarity surrounding the more tangible side of ESOPs, specifically, the significant tax benefits available to both the selling shareholder and the surviving company.
Pat Stoltz
contributions it makes to the trust (established to oversee the transaction on behalf of the employees) are tax deductible, thereby reducing taxable income. C-corps also have the ability to make a tax deductible dividend (typically allowable up to certain market driven parameters), “Because in its simplest form an ESOP is a qualified benefit plan, the contributions it makes to the trust are tax deductible, thereby reducing taxable income.”
When it comes to transitioning a business, a selling shareholder has finite options, including a strategic buyer, private equity, its management team, or an ESOP. These options all have different tax implications to all of the parties involved. It is important to note that ESOP ownership offers significant tax advantages to both the selling shareholders as well as the surviving company. In order to more accurately assess the economics behind all potential offerings, these tax advantages should be well understood before a shareholder commits to a preferred sale path. ESOPs can only take the form of a C-corporation or an S-corporation. Because in its simplest form an ESOP is a qualified benefit plan, the
Jim Swabowski
See PAT STOLTZ & JIM SWABOWSKI, page 12
THE ZWEIG LETTER April 29, 2019, ISSUE 1294
Made with FlippingBook Annual report