Employee Benefits-IRS Allows An LLC To Adopt An ESOP

In PLR 201538021, the IRS provided a private ruling which allowed an LLC to adopt an ESOP. The letter was issued in response to a request for a ruling, concerning whether the unit shares of Company A, a limited liability company or LLC, constitute employer securities within the meaning of section 409(l)(2) of the Internal Revenue Code (“Code”). If they do, the LLC could adopt an ESOP which holds the unit shares.

Here is what the IRS said in the PLR.

For federal tax purposes, Company A represented that it is classified as an association and has a valid S corporation election. Ownership interest in Company A is represented by unit shares (“Unit Shares”). Under its operating agreement (the “Operating Agreement”), all profits and losses of Company A, and any dividends to be paid by Company A, are to be allocated among the shareholders in proportion to the number of Unit Shares owned by them. The Operating Agreement further provides that all Unit Shares confer identical rights to voting distributions, dividends and liquidation proceeds, and otherwise meet the requirements of Code section 409(l)(2). In addition Company has no authorized, issued, or outstanding employer securities that are readily tradable on an established securities market within the meaning of Code section 409(l)(1).

Company A intends to adopt an employee stock ownership plan as described in Code section 4975(e)(7) (“ESOP”), in which its employees may participate. Section 4975(e)(7) defines an ESOP as a defined contribution plan which, among other things, is designed to invest primarily in qualifying employer securities. Code section 4975(e)(8) defines the term “qualifying employer security” as any employer security within the meaning of Code section 409(l). As applicable here, Code section 409(l)(2) states that the term “employer securities” means common stock issued by the employer-corporation having a combination of voting power and dividend rights equal to or in excess of:

(A) that class of common stock of the employer-corporation having the greatest voting power, and (B) that class of common stock of the employer-corporation having the greatest dividend rights.

Further, under the Code, Company A is treated as a corporation, and the Unit Shares as shares of stock.

Based on the foregoing, the IRS concludes that the Unit Shares of Company A are employer securities as described in section 409(l)(2) for the purposes of section 4975(e)(7), so that Company A may maintain an ESOP which invests in the Unit Shares.