Multiple S Corps

[Guest michaels4811]

There are multiple s corporations with one shareholder owning over 60% of each. They are trying to form a single parent S corp. to use as the vehicle to form an ESOP and own control of all corporations. Can 1 ESOP be formed at the parent company level and have it cover employees of the 60% subs? I would think this would be permissible - if it turns out to not be a controlled group, it would be treated as a multiple employer plan and subject to the rules under 413?

Any insight would be greatly appreciated.

[cs771]

any ideas would be greatly, greatly appreciated.

[rcline46]

Well, let's start with what an ESOP is - invests primarily in stock of the employer. With apologies to Derrin - Who's the Employer? You must first make that determination. Controlled Group? Affiliated Service Group?

If you may end up with a multiple employer plan, how would that be a true ESOP if the stock is not that of each separate employer? I would think this is an issue.

This board would not give you very good answers because you are deep into technical and legal issues here. Regardless of the cost, you/the client needs to get an experienced ESOP attorney involved and maybe an ERISA attorney also. On the cheap all I see here are really big problems.

[cs771]

Well, let's start with what an ESOP is - invests primarily in stock of the employer. With apologies to Derrin - Who's the Employer? You must first make that determination. Controlled Group? Affiliated Service Group?

If you may end up with a multiple employer plan, how would that be a true ESOP if the stock is not that of each separate employer? I would think this is an issue.

This board would not give you very good answers because you are deep into technical and legal issues here. Regardless of the cost, you/the client needs to get an experienced ESOP attorney involved and maybe an ERISA attorney also. On the cheap all I see here are really big problems.

I appreciate it. We are not even at the ESOP feasibility stage, but I was looking to see what types of answers I would get off of this before we moved any further. If someone came back with an answer that this if not a control group or affiliated service group than you cannot have a multiple employer ESOP then it would save a big waste of money. We will definitely NOT put an ESOP in without doing a study and reviewing all avenues, but was hoping to get some direction. I do appreciate what you have provided.

[Marcus R Piquet]

Hello,

I'm not an attorney, but I'll briefly describe an ESOP transaction that we were just involved in because it might be somewhat similar to what you are considering.

Two companies had a common history but currently no common ownership; legally they were completely independent of each other although they both supported each other informally in many ways. The owners of both companies were interested in forming an ESOP and decided that it would be best to do so as a group. A new parent/holding company was formed, and the shareholders of the two operating companies exchanged their shares for shares of the new holding company. At this point the operating companies are subsidiaries of a common parent. The Parent formed the ESOP and the shareholders sold their shares to the Parent ESOP. The employees of both operating subsidiaries are participants of the Parent ESOP. It is a single-employer plan. The Parent corporation filed an S Election post transaction, as well as QSUB elections for the subsidiaries. As a result, there is only one tax return (1120S) filed. For various reasons, the subsidiaries are audited separately and issue separate audited financial statements.

There are a lot of details I left out, but perhaps it helps you a bit.

Best,

Marcus