An employee stock ownership plan (ESOP) is a flexible exit planning strategy for business owners where the seller receives fair market value and favorable tax treatment on sale, the company receives tax-advantaged financing and enhanced cash flow, and the employees receive valuable retirement benefits and continued employment in a rewarding and motivational environment.

What are the tax benefits of an ESOP?

• Capital gain on the sale of shares of a C corporation to an ESOP may be deferred by the selling owner as long as, among other requirements, the ESOP owns 30% or more of the corporation’s shares after the transaction and the selling owner invests the sale proceeds in qualified replacement property.
• The percentage of profits of an S corporation owned by an ESOP are not subject to federal (and possibly state) income tax, because ESOPs are income tax exempt.
• Contributions by the company to the ESOP (including contributions used by the ESOP to pay principal and interest on a loan) are considered contributions to a tax qualified employee benefit plan and are tax deductible within certain limits.
• Dividends paid on stock held by the ESOP are tax deductible to a C corporation (but not an S corporation) if they are distributed to ESOP participants or are used to pay principal and interest on a loan.
• There are estate as well as charitable gifting planning opportunities for the selling owner.
• Employees receive tax-deferred retirement benefits, eligible for tax-free rollover upon distribution from the ESOP.

Have Additional Questions About the Tax Advantages of an ESOP for Your Company?

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BDO’s ESOP Advisors have a wide range of experience in investment banking, tax, valuation, employee benefits consulting, ESOP administration, and commercial banking, including representatives in our wholly-owned investment bank, BDO Capital Advisors, LLC.