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Tax Benefits

ESOPs are set up and guided as a retirement benefit for employees. However, ESOPs also have tax-benefits to encourage companies and sellers to pursue ESOPs.

Tax-Benefits to the Seller

The seller of the company can defer capital gains tax associated with the sale to Employee Stock Ownership Plans (ESOPs). It can be deferred if the seller re-invests the money between 3 and 12 months after the sale. As a result the take home cash for a seller can be much higher when selling to ESOPs.

Tax-Benefits to the Company

In a C corporation the company receives tax benefits for loans that finance the purchase of stock for an ESOP and for dividends paid to the ESOP. The loan can be repaid in pre-tax dollars. So, the repayment of the principal is tax deductible in addition to the interest. Also, the portion of dividends that are earned by the ESOP can be tax deductible.

In a S Corporation the percentage of the company that is employee owned is not subject to tax.  So, a 100% employee owned S corporation would be a tax free for-profit company.

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