Benefit #8 of selling to an ESOP: It provides more ESOP after-tax payments than a sale to a third party. The ESOP cannot pay a synergistic premium. Selling to an ESOP is always a stock sale which is more favorable from a tax standpoint than a traditional asset sale.
When analyzing the purchase price, it is essential to consider the after-tax proceeds when comparing an ESOP transaction sale to a third-party sale. In a stock sale, the seller is generally eligible for long-term capital gain treatment at the current long-term capital gains rate. The more common sale alternative, the asset sale, is generally taxed at the higher ordinary-income rate.
Additional key tax benefit; 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.