Can an S Corporation Adopt an ESOP?

Yes. Effective January 1, 1998 it became advantageous for an ESOP to be a shareholder of an S corporation under the federal tax laws. For S corporation purposes, the ESOP trust is considered to be a single shareholder, so the number of participants in an S corporation ESOP is not subject to the limitations on the maximum number of S corporation shareholders. To the extent that the S corporation is owned by an ESOP, no federal income taxes on corporate income are payable by either the shareholders or the company. In addition, most states do not tax the income of ESOP-owned S corporations. These tax benefits create a significant competitive advantage for S corporations which are substantially ESOP owned.

However, S corporation ESOPs are subject to certain limitations and restrictions.