Benefit #2 of selling to an ESOP: The annual company tax and cash flow savings are greater than the annual ESOP expenses. An ESOP is one of the most cash and tax-efficient succession plans available to business owners. The ESOP trust is an S Corporation shareholder that is a tax-exempt entity not subject to income taxes. S corporations are pass-through entities that pass through their corporate income to their shareholders for federal and state income tax reporting purposes. Each year the shareholders receive an IRS Form K-1 and report the flow-through of the income on their personal tax returns based on their individual federal and state income tax rates.
The portion of a company owned by an S Corporation ESOP is not subject to federal or state income taxation, increasing cash flow and providing the company with a competitive advantage. This means that S Corporations that are 100% ESOP-owned are not subject to any federal or state income taxes, increasing cash flow and providing the company with a competitive advantage.
Check out this brief animated video to learn more about ESOPs.