The concept of employees owning stock in their employer is not new. Unlike other qualified plans, an ESOP must invest primarily in employer securities and may borrow against the employer's credit to cover the acquisition costs. This change presents several important planning opportunities for closely- held corporations that are S corporations and for C corporations that currently have ESOPs.
Diversification is crucial for owners of privately held businesses who are nearing retirement age.
If the major personal asset is stock in a closely-held business, an ESOP provides a valuable diversification vehicle. The effect of a properly structured rollover is to defer the tax liability on the sale to the ESOP until the publicly-traded securities are sold. There may also be tax advantages to the corporation. If instead the company were to use borrowed money to purchase the stock directly from the owners in a typical redemption, then only the interest payments would be deductible. A C corporation that is not interested in utilizing the traditional ESOP tax incentives, or that already has an ESOP in place, may want to consider converting to S status.