Business Law Information: New Ruling Allowing an LLC to adopt an ESOP

The IRS released a recent Private Letter Ruling (PLR 201538021) that surprisingly allows a Limited Liability Company (“LLC”) to adopt an ESOP. This is a new development that should be considered with caution since a PLR only applies to the taxpayer that asked for the ruling and there are some pre-requirements that may continue to create a tax problem if implemented. Here’s the story: Background The rules under the Internal Revenue Code have so far limited the use of ESOPs to C- or S-Corporations. One of the requirements for an ESOP is that it invests predominantly in qualifying employer securities. LLCs were not permitted to have ESOPs because the membership units were not considered qualifying employer securities. As a result, an LLC had to be converted to a corporation in order to utilize an ESOP. Although the process may not be all that complicated, it sometimes created adverse tax consequences for a converting owner. New developments In a the recent Private Letter Ruling mentioned above, the IRS ruled that the membership units of an LLC will be considered as qualified employer securities under the Internal Revenue Code. This means that an LLC could establish an ESOP and have it hold LLC units. The ruling is conditioned on the LLC and its units having…