Prior to 1997's amendment to the Small Business Job Protection Act, a number of stock restrictions were tied to S corporations
. Only people or taxable entities were eligible to own stock within an S corp and corporate profits were subject to taxes. Under the amendment, however, a nontaxable Employee Stock Ownership Plan is now eligible to hold stock in an S corp, giving shareholders a venue through which to defer their taxes, AllBusiness reported.
Basically, if a business owner sets up an Employee Stock Ownership Plan for an S corp, and owns at least 40 percent of its stock, 40 percent of the business' earnings will remain untaxed. Unless an employee withdraws from the plan when he or she retires or leaves the company, the individual won't be taxed on the plan.
When the changes were put into place, it also increased the number of individuals eligible to hold stock in an S corp from 35 to 75, the source noted. A unique attribute to S corps is that the IRS limits who is eligible to hold stock, so shareholders must be within the boundaries of an Employee Stock Ownership Plan or fall under other certain, specific categories. Business owners should be sure to do their research before allotting stock to shareholders.
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