ABRC-ESOP

Evan L. Rhodes: In the last several years, there has been a steady increase of businesses forming as, or converting to, an L.L.C. structure. While this structure is called a corporation, its legal structure is closer to that of a partnership. Since there is no issuance of stock in an L.L.C., you cannot directly install an ESOP in an L.L.C.

Since S-Corps and the L.L.C. are taxed identically, the advantage lies with the S-Corp and its ability to be tax-exempt through utilization of an ESOP. The L.L.C. provides more personal liability protection to ownership compared to the standard S-Corporation. However, an S-Corp ESOP provides liability protection at least equal to and possibly greater than the L.L.C.

An S-Corporation can be a member of an L.L.C. Since an L.L.C. is a flow-through tax entity, the tax burden on the income of the L.L.C. (K-1) passes through to the S-Corporation. The S-Corporation is taxed on those proceeds based on the tax rate of its shareholder. In the event the S-Corporation's shareholder is the tax-exempt ESOP, then all proceeds received from the L.L.C. are also tax-exempt. It is clear that there are many potential benefits involved from converting or combining tax-exempt S-Corporations and L.L.C.'s.