The ‘ESOP-Owned S corporation’ structure offers truly remarkable advantages that can transform a business into a tax-exempt, for-profit entity. An S corporation whose stock is held in an ESOP, of course, pays no federal income tax (and little or no state income tax) at the corporate level. That is true of every S corporation. But most S corporations still suffer a tax-related drain on their cash flow because the net earnings of the business are attributed to the shareholder(s), who will typically need to pull money out of the company to pay their resulting personal tax liability — leaving the company with no more after-tax cash than if it had been a conventional C corporation.
But what if the sole shareholder is a tax-exempt qualified retirement plan — that is, an ESOP?