April 2nd, 2012 by Brian Bornino
It’s tax time. Time for everyone (including me) to be in a miserable mood because of the high taxes we all pay. Well, almost everyone….
Despite many of us trying our best to spread the word, I cannot believe how few business owners and advisors are aware that it is possible to create a business that is completely income tax-free…no tax at the corporate level, no pass-through tax at the shareholder level. No income tax. Period.
With the Taxpayer Relief Act of 1997, Employee Stock Ownership Plans (“ESOPs”) became eligible shareholders of S-corporations. At that point, the dream of an income tax-free company became a reality. S-corporations don’t pay tax at the corporate level, so the income tax liability is passed through to the shareholders…but in the case of a 100% ESOP-owned S-corporation, the sole shareholder is a tax-exempt trust. Hence, the income tax-free company is a reality.
Since that this law became effective, about 3,000 companies have become 100% ESOP-owned. Why not more? I have no idea!!
Sure, ESOPs are not for every situation. They are often not the best solution for a selling shareholder or a company, and there are some complexities. But, very often (and much more often than is recognized), ESOPs offer a unique, savvy, and effective business succession and ownership transition planning tool. Oh yeah, and never paying income tax again is nice too.