ESOP Structure Alternatives

Leveraged 1042 ESOP Transaction
(Company Funded)

1. Company lends the ESOP money.

2. Company carries a Note with the ESOP.

3. The ESOP buys shares from Shareholder with borrowed funds.

4. The number of shares sold to the ESOP must be at least 30% to qualify for 1042 Rollover.

5. Shareholder rolls proceeds into Qualified Replacement Securities.

6. Company makes annual deductible contributions to the ESOP.

7. The ESOP uses contribution money to pay the debt service.

 

Leveraged 1042 ESOP Transaction
(Bank Funded)

1. Bank lends the ESOP money.

2. Bank carries a Note with the ESOP.

3. The ESOP buys shares from Shareholder with borrowed funds.

4. The number of shares sold to the ESOP must be at least 30% to qualify for 1042 Rollover.

5. Shareholder rolls proceeds into Qualified Replacement Securities.

6. Company makes annual deductible contributions to the ESOP.

7. The ESOP uses contribution money to pay the debt service.

 

Leveraged 1042 ESOP Transaction
(Seller/Shareholder Funded)

1. Shareholder lends the ESOP money.

2. Shareholder carries a Note with the ESOP.

3. The ESOP buys shares from Shareholder with borrowed funds.

4. The number of shares sold to the ESOP must be at least 30% to qualify for 1042 Rollover.

5. Shareholder rolls proceeds into Qualified Replacement Securities.

6. Company makes annual deductible contributions to the ESOP.

7. The ESOP uses contribution money to pay the debt service.

 

Non-Leveraged 1042 ESOP Transaction

1. Company makes annual deductible contributions to the ESOP.

2. After several years of cash build-up, the ESOP buys shares from Shareholder.

3. The number of shares sold to the ESOP must be at least 30% to qualify for 1042 Rollover.

4. Shareholder rolls proceeds into Qualified Replacement Securities.


These charts are for C-Corporations only. While similar leveraged and non-leveraged transactions could be done in an S-Corporation, the IRC ยง1042 Tax Free Rollover is not available to S-Corporations.

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