Many family businesses start out as C corporations to maintain working capital as they grow. However, as cash reserves grow, owners can be hesitant to declare dividends due to potential double taxation—first at the corporate level and then again on distribution to shareholders.
In a Pass-Through entity, taxes are paid by shareholders on a pro-rata basis, allowing any undistributed profits to accumulate in an Adjusted Account, which can be accessed without incurring additional taxes, making it a favorable structure for many.
The Employee Stock Ownership Plan (ESOP) model is gaining traction among family businesses, as it allows employees to acquire ownership over time while providing tax benefits, especially when properly structured as an S or C Corporation.
Transitioning to an ESOP offers a tax-qualified method for employees to gain beneficial ownership incrementally, with dividends from C Corporations being tax-deductible while elevated tax benefits are not granted to distributions in S Corporations.
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