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News Flash from 1998: 100% ESOP-Owned S-Corporations are Income Tax-Free Entities!

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.

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