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53-541: The paper started in 1871 and was independently owned and run by four generations of the Paddock family. In 2018, the Paddock family sold its stake in the paper to its employees through an employee stock ownership plan . The Daily Herald serves Cook , DuPage , Kane , Lake , and McHenry counties and has a coverage area of about 1,300 square miles (3,400 km). It is the third-largest newspaper in Illinois (behind

106-439: A distribution from the plan when they leave the company. They can roll the amount over into an IRA, as can participants in any qualified plan. There is no requirement for a private sector employer to provide retirement savings plans for employees. Some studies conclude that employee ownership appears to increase production and profitability and improve employees' dedication and sense of ownership. ESOP advocates maintain that

159-524: A fiscal year (a year ending on the last day of a month other than December) is used, by the 15th day of the third month immediately following the last day of the fiscal year. The corporation must complete a Schedule K-1 for each person who was a shareholder at any time during the tax year and file it with the IRS along with Form 1120S. The second copy of the Schedule K-1 must be mailed to the shareholder. As

212-675: A loan, called a "leveraged ESOP", can provide a tax-advantaged means for the company to raise capital. According to a pro-ESOP organization, at least 75% of ESOPs are, or were at some time, leveraged. According to citing ESOP Association statistics as cited in. In addition, ESOPs can be attractive instruments of corporate succession, allowing a retiring shareholder to diversify the company of stock while deferring capital gains taxes indefinitely. Company insiders face additional conflicts of interest in connection with an ESOP's purchase of company stock, which most often features company insiders as sellers and in connection with decisions about how to vote

265-664: A national trade association based in Washington, DC, the most common reason for establishing an ESOP is to buy stock from the owners of a closely held company. Many closely held companies have little or no succession plan in place. As a result, the day a founder or primary shareholder leaves the business often results in significant adverse consequences for the company, the employees, and the exiting owner. ESOPs offer transitional flexibility that can facilitate succession planning. Founders and main shareholders can sell to ESOPs all of their shares at one time, or percentages of their shares on

318-436: A plan specifically meant to be for retirement security. In contrast, they maintain that it may not be a serious problem for an ESOP or other options, which they say are meant as wealth-building tools, preferably to exist alongside other plans. Nonetheless, ESOPs are regulated as retirement plans, and they are presented to employees as retirement plans, just like 401(k) plans. ESOPs and 401(k)s are both retirement plans subject to

371-423: A regular C corporation. An S corporation's election will also terminate if, for each of three consecutive years, (i) its passive investment income exceeds 25% of gross receipts and (ii) it has accumulated earnings and profits. § 1362(d)(3). An S corporation will only have accumulated earnings and profits if it was a C corporation at some time, or acquired or merged with a C corporation. [1] The S election affects

424-469: A result, were more likely to offer additional diversified retirement plans alongside their ESOPs. Opponents to ESOP have criticized these pro-ESOP claims and say many of the studies are conducted or sponsored by ESOP advocacy organizations and criticizing the methodologies used. Critics argue that pro-ESOP studies did not establish that ESOPs results in higher productivity and wages. ESOP advocates agree that an ESOP alone cannot produce such effects; instead,

477-431: A shareholder in another, subsidiary S corporation if the first S corporation owns 100% of the stock of the subsidiary corporation, and an election is made to treat the subsidiary corporation as a "qualified subchapter S subsidiary" (QSub). After the election is made, the subsidiary corporation is not treated as a separate corporation for tax purposes, and all "assets, liabilities, and items of income, deduction, and credit" of

530-402: A small number of shareholders in order to take advantage of the beneficial features of the corporate form; this is particularly true of firms established prior to the advent of the modern limited liability company . Therefore, taxation of S corporations resembles that of partnerships. Unlike a C corporation, an S corporation is not eligible for a dividends received deduction and not subject to

583-474: A state tax law equivalent to an S corporation, so that the S corporation in certain states may be treated the same way for state income tax purposes as it is treated for Federal purposes. A state taxing authority may require that a copy of the Form 1120S return be submitted to the state with the state income tax return. Some states such as New York and New Jersey require a separate state-level S election in order for

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636-559: Is part of a larger IRS effort to improve tax compliance and reduce the estimated $ 300 billion gap in gross reported figures each year. A large portion of that gap is thought to come from small businesses (and particularly S corporations, which are now the most common corporate entity, numbering over four million in 2011, up from three million in 2002 and about 750,000 in 1985). States impose tax laws and regulations for corporate income and distributions, some of which may be directed specifically at S Corporations. Some but not all states recognize

689-549: Is taxed at the shareholder level and not at the corporate level. Payments to S shareholders by the corporation are distributed tax-free to the extent that the distributed earnings were previously taxed. Like a C corporation , an S corporation is generally a corporation under the law of the state in which the entity is organized. With modern incorporation statutes making the establishment of a corporation relatively easy, firms that might traditionally have been run as partnerships or sole proprietorships are often run as corporations with

742-535: Is that investors should diversify their investments across many companies, industries, geographic locations, etc. Moreover, ESOPs concentrate workers' retirement savings in the stock of the same company on which they depend for their wages and current benefits, such as health insurance, worsening the non-diversification problem. High-profile examples illustrate the problem. Employees at companies such as Enron and WorldCom lost much of their retirement savings by overinvesting in company stock in their 401(k) plans, but

795-480: Is the case for any other corporation, the FICA tax is imposed only with respect to employee wages and not on distributive shares of shareholders. Although FICA tax is not owed on distributive shares, the IRS and equivalent state revenue agencies may recategorize distributions paid to shareholder-employees as wages if shareholder-employees are not paid a reasonable wage for the services they perform in their positions within

848-649: The Chicago Tribune and Chicago Sun-Times ). The Daily Herald was founded in 1872 as the Cook County Herald . It was initially tailored to the business needs of the then-rural northwestern portion of Cook County . Hosea C. Paddock, a former teacher, bought the newspaper in 1889 for $ 175. His sons, Stuart and Charles, took over the paper in 1920 and renamed it the Arlington Heights Herald in 1926. For its first century, it

901-622: The Employee Retirement Income Security Act (ERISA). While similar in some ways, the plans also have notable differences. These differences can form a strength: Businesses that offer both an ESOP and a 401(k), as 93.6 percent of The ESOP Association's members do, can offer the best of both plans to their employees. Because ESOPs are the only retirement plans allowed by law to borrow money, they can be attractive to company owners and managers as instruments of corporate finance and succession. An ESOP formed using

954-716: The United States Department of Labor , there are approximately 6,237 companies in America with an ESOP. Notable U.S. employee-owned corporations include the 250,000 employee supermarket chain Publix Supermarkets , Hy-Vee , McCarthy Building Company, WinCo Foods , environmental consulting firm Citadel Environmental Services, Inc., and Harpoon Brewery . Today, most private U.S. companies that are operating as ESOPs are structured as S corporations ESOPs (S ESOPs). According to The ESOP Association ,

1007-554: The 1.5% net income tax. Conversely, for high-gross-revenue, low-profit-margin businesses, the LLC franchise tax fees may exceed the S corporation net income tax. S Corporations operating in the City of Wilmington are not subject to the city's 1.25% net profits tax. Employee wages are subject to the city's 1.25% wage tax. In New York City, S corporations are subject to the full corporate income tax at an 8.85% rate. If one can demonstrate that

1060-486: The 1980s, it expanded into DuPage, Kane and McHenry counties. Its growth has continued to this day. Stuart Paddock Jr. died in 2002. Today, the Daily Herald ' s motto is, "Big Picture, Local Focus" because it covers both international and national news as well as news local to its circulation area. The Daily Herald was made partially employee-owned in 1972, but the Paddock family transferred their interest to

1113-634: The ESOP must be combined with worker empowerment through participatory management and other techniques. Critics point out that no study has separated the effects of those techniques from the effects of an ESOP; that is, no study shows that innovative management cannot produce the same (claimed) effects without an ESOP. In some circumstances, ESOP plans were designed that disproportionately benefit employees who enrolled earlier by accruing more shares to early employees. Newer employees, even at stable and mature ESOP companies can have limited opportunity to participate in

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1166-446: The IRS to show leniency with regard to late S elections. Accordingly, often, the IRS will accept a late S election. If a corporation that has elected to be treated as an S corporation ceases to meet the requirements (for example, if as a result of stock transfers, the number of shareholders exceeds 100 or an ineligible shareholder such as a nonresident acquires a share), the corporation will lose its S corporation status and revert to being

1219-673: The Internal Revenue Code (sections 1361 through 1379). The United States Congress , acting on the Department of Treasury's suggestion of 1946, created this chapter in 1958 as part of a larger package of miscellaneous tax items. S status combines the legal environment of C corporations with U.S. federal income taxation similar to that of partnerships. As with partnerships, the income, deductions, and tax credits of an S corporation flow through to shareholders annually, regardless of whether distributions are made. Thus, income

1272-747: The QSub are treated belonging to the parent S corporation. Spouses (and their estates) are automatically treated as a single shareholder. Families, defined as individuals descended from a common ancestor, plus spouses and former spouses of either the common ancestor or anyone lineally descended from that person, are considered a single shareholder as long as any family member elects such treatment. An S corporation may only have one class of stock . A single class of stock means that all outstanding shares of stock confer "identical rights to distribution and liquidation proceeds," i.e. profits and losses are allocated to shareholders proportionately to each one's interest in

1325-660: The United States: S corporation An S corporation (or S Corp), for United States federal income tax , is a closely held corporation (or, in some cases, a limited liability company (LLC) or a partnership ) that makes a valid election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code . In general, S corporations do not pay any income taxes . Instead, the corporation's income and losses are divided among and passed through to its shareholders . The shareholders must then report

1378-707: The appreciation occurred during the time the corporation was a C corporation, the S corporation will probably pay C corporation taxes on the appreciation – even though the corporation is now an S corporation. This Built In Gain (BIG) tax rate is 35% on the appreciated property, but is only realized if the BIG property is sold within 10 years (starting from the first day of the first tax year of conversion to S –Corp status). The American Recovery and Reinvestment Act of 2009 reduced that 10-year recognition period to seven years (if that seventh year precedes either 2009 or 2010). The Small Business Jobs Act of 2010 further reduced

1431-485: The business. § 1.1361-1(l)(1). Differences in voting rights are disregarded, which means that an S corporation may have voting and nonvoting stock. If a corporation meets the foregoing requirements and wishes to be taxed under Subchapter S, its shareholders may file Form 2553 : "Election by a Small Business Corporation" with the Internal Revenue Service (IRS). The Form 2553 must be signed by all of

1484-773: The company can choose to have the trust borrow money to buy stock (also known as a leveraged ESOP, with the company making contributions to the plan to enable it to repay the loan). Generally, almost every full-time employee with a year or more of service who worked at least 20 hours a week is in an ESOP. The United States ESOP model is tied to the unique US system encouraging private retirement savings plans and tax policies that reflect that goal. That makes it difficult to compare to other tax codes from other nations. Most private US companies operating as an ESOP are structured as S corporation ESOPs (S ESOPs). The United States Congress established S ESOPs in 1998, to encourage and expand retirement savings by giving millions more American workers

1537-438: The company. In 2005, the IRS launched a study to assess the reporting compliance of S corporations The study began in late 2005 and examined 5,000 randomly selected S corporation returns from tax years 2003 and 2004. The IRS intends to use the results to measure compliance in recording of income, deductions and credits from S corporations, and to formulate future audit criteria to better target likely non-compliant returns. This

1590-509: The corporation to be treated, for state tax purposes, as an S corporation. S corporations pay a franchise tax of 1.5% of net income in the state of California ( minimum $ 800). This is one factor to be taken into consideration when choosing between a limited liability company and an S corporation in California. For highly profitable enterprises, the LLC franchise tax fees (minimum $ 800), which are based on gross revenues, may be lower than

1643-430: The corporation to the shareholder, but instead to the portion of the corporation's income, losses, deductions or credits that are reported to the shareholder on Schedule K-1 and are shown by the shareholder on his or her own income tax return. A distribution to a shareholder that is in excess of the shareholder's basis in his or her stock is taxed to the shareholder as capital gain. Quarterly estimated taxes must be paid by

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1696-399: The corporation's shareholders. If a shareholder resides in a community property state, the shareholder's spouse generally must also sign the 2553. The S corporation election must typically be made by the fifteenth day of the third month of the tax year for which the election is intended to be effective, or at any time during the year immediately preceding the tax year. Congress has directed

1749-642: The employee; 6.2% Social Security paid by the employer; 1.45% employee Medicare and 1.45% employer Medicare). The distribution of the additional profits from the S corporation will be done without any further FICA tax liability. If for some reason, Alex (as the majority owner) were to decide not to distribute the money, both Alex and Jesse would still owe taxes on their pro-rata allocation of business income, even though neither received any cash distribution. To avoid this "phantom income" scenario, S corporations commonly use shareholder agreements that stipulate at least enough distribution must be made for shareholders to pay

1802-399: The federal government. Also, the study found that total output was equivalent to 1.7 percent of 2010 U.S. GDP. $ 93 billion (or 0.6 percent of GDP) came directly from S ESOPs, while output in supported industries totaled $ 153 billion (or 1.1 percent of GDP). In a U.S. ESOP, just as in every other form of qualified pension plan, employees do not pay taxes on the contributions until they receive

1855-512: The income or loss on their own individual income tax returns . S corporations are ordinary business corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. The term "S corporation" means a "small business corporation" which has made an election under § 1362(a) to be taxed as an S corporation. The S corporation rules are contained in Subchapter S of Chapter 1 of

1908-607: The individual to avoid tax penalties, even if this income is "phantom income". Widgets Inc., an S Corp, makes $ 10,000,000 in net income (before payroll) in 2006 and is owned 51% by Alex and 49% by Jesse. Keeping it simple, Alex and Jesse both draw salaries of $ 94,200 (which is the Social Security Wage Base for 2006, after which no further Social Security tax is owed). Employee salaries are subject to FICA tax (Social Security & Medicare tax) – currently 15.3 percent (6.2% Social Security paid by

1961-455: The key variable in securing these claimed benefits is to combine an ESOP with a high degree of worker involvement in work-level decisions (employee teams, for instance). Employee stock ownership can increase the employees' financial risk if the company does badly. ESOPs, by definition, concentrate workers' retirement savings in the stock of a single company. Such concentration is contrary to the central principle of modern investment theory, which

2014-764: The main form of employee ownership have considerably more in retirement assets than comparable employees in non-ESOP firms. The most comprehensive of the studies, a report on all ESOP firms in Washington state, found that the retirement assets were about three times as great, and the diversified portion of employee retirement plans was about the same as the total retirement assets of comparable employees in equivalent non-ESOP firms. The Washington study, however, showed that ESOP participants still had about 60% of their retirement savings invested in employer stock. Wages in ESOP firms were also 5-12% higher. National data from Joseph Blasi and Douglas Kruse at Rutgers shows that ESOP companies are more successful than comparable firms and, perhaps as

2067-412: The northern suburbs in 1966. A brutal one-year circulation war ensued, ending in 1970 when Field pulled out of the area. That year, the paper dropped Arlington Heights from its masthead after merging with its sister publications and expanding into Lake County. It began publishing on Saturdays in 1975. It became the Daily Herald in 1977 and began publishing on Sundays in 1978. During the second half of

2120-564: The northwest suburbs (now the Union Pacific/Northwest Line ) turned it into a suburban area. It became a tri-weekly in 1967. The paper's real growth began in 1968, when Stuart Paddock Jr. took over the paper. A year later, the paper began publishing five days a week. This move came almost out of necessity; Field Communications , publisher of the Chicago Sun-Times , had introduced its "Daily" papers for

2173-494: The opportunity to have equity in the companies where they work. ESOP advocates credit S ESOPs with providing retirement security, job stability and worker retention, by the claimed culture, stability and productivity gains associated with employee-ownership. A study of a cross-section of Subchapter S firms with an Employee Stock Ownership Plan shows that S ESOP companies performed better in 2008 compared to non-S ESOP firms, paid their workers higher wages on average than other firms in

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2226-563: The paper's employee stock ownership plan in 2018 as part of their effort to ensure the paper remains locally owned. Employee Stock Ownership Plan An Employee Stock Ownership Plan ( ESOP ) in the United States is a defined contribution plan, a form of retirement plan as defined by 4975(e)(7)of IRS codes, which became a qualified retirement plan in 1974. It is one of the methods of employee participation in corporate ownership. According to an analysis of data provided by

2279-817: The presence of an ESOP itself causes any positive effects for companies or workers. One study estimates that the net US economic benefit from S ESOP savings, job stability and productivity totals $ 33 billion per year. A study released in July 2012 found that S corporations with private employee stock ownership plans added jobs over the last decade more quickly than the overall private sector. A 2013 study found that in 2010, 2,643 S ESOPs directly employed 470,000 workers and supported an additional 940,000 jobs, paid $ 29 billion in labor income to their own employees, with $ 48 billion in additional income for supported jobs, and tax revenue initiated by S ESOPs amounted to $ 11 billion for state and local governments and $ 16 billion for

2332-422: The program, as a large portion of the shares may have already been allocated to longstanding employees. ESOP advocates often maintain that employee ownership in 401(k) plans, as opposed to ESOPs, is problematic. About 17% of total 401(k) assets are invested in company stock, more in those companies that offer it as an option (although many do not). ESOP advocates concede that it may be an excessive concentration in

2385-408: The recognition period to five years. If a shareholder owns more than 2% of the outstanding stock, amounts paid for group health insurance for that shareholder are included on their W-2 as "wages". The same applies to amounts contributed to health savings accounts (HSA). Form 1120S generally must be filed by March 15 of the year immediately following the calendar year covered by the return or, if

2438-557: The same industries, contributed more to their workers' retirement security, and hired workers when the overall U.S. economy was pitched downward and non-S ESOP employers were cutting jobs. Scholars estimate that annual contributions to employees of S ESOPs total around $ 14 billion. Critics say, however, that such studies fail to control for factors other than the existence of the ESOP, such as participatory management strategies, worker education, and pre-ESOP growth trends in individual companies. They maintain that no studies have shown that

2491-459: The schedule of their choosing. The transition in leadership, therefore, can occur as quickly or slowly as the owner wishes. Like other tax-qualified deferred compensation plans, ESOPs must not discriminate in their operations in favor of highly compensated employees, officers, or owners. In an ESOP, a company sets up an employee benefit trust that is funded by contributing cash to buy company stock or contributing company shares directly. Alternately,

2544-444: The shares of stock held by the ESOP but not yet allocated to participants' accounts. In a leveraged ESOP, such unallocated shares often far outnumber allocated shares for many years after the leveraged transaction. This is a timeline of significant events in the development of ESOPs as a financial instrument, as well as some of the key personalities involved in developing the basic concepts, laws and organizations related to ESOPs in

2597-507: The specific companies were not employee-owned. Enron, Polaroid and United Airlines , all of which had ESOPs when they went bankrupt, were C corporations . Most S corporation ESOPs offer their employees at least one qualified retirement savings plan like a 401(k) in addition to the ESOP, allowing for greater diversification of assets. Studies in Massachusetts, Ohio, and Washington State show that on average, employees participating in

2650-451: The taxes on their distributive shares. S corporations that have previously been C corporations may also, in certain circumstances, pay income taxes on untaxed profits that were generated when the corporation operated as a C corporation. This is very common with uncollected accounts receivable or appreciated real estate. For example, if an S corporation that was formerly a C corporation sells an appreciated asset (such as real estate) and

2703-744: The ten percent of taxable income limitation applicable to charitable contribution deductions. A corporation is eligible if it: A limited liability company (LLC) is eligible to be taxed as an S corporation under the check-the-box regulations at § 301.7701-2. The LLC first elects to be taxed as a corporation , at which point it becomes a corporation for tax purposes; then it makes the S corporation election under section 1362(a). Shareholders must be U.S. citizens or residents (not nonresident), and must be natural persons, so corporations and partnerships are ineligible shareholders. Certain trusts, estates, and tax-exempt corporations, notably 501(c)(3) corporations, are permitted to be shareholders. An S corporation may be

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2756-542: The treatment of the corporation for Federal income tax purposes. The election does not change the requirements for that corporation for other Federal taxes such as FICA and Federal unemployment taxes. While an S corporation is not taxed on its profits, the owners of an S corporation are taxed on their proportional shares of the S corporation's profits. Actual distributions of funds, as opposed to distributive shares, typically have no effect on shareholder tax liability. The term "pass through" refers not to assets distributed by

2809-663: Was a weekly publication. In 1898, Hosea Paddock bought the Palatine Enterprise . Over the years, the Paddocks bought newspapers in Mount Prospect , Bensenville , Roselle and Wheeling . The Daily Herald counts 1898 as its founding date. The paper grew along with northwestern Cook County after World War II, as four-lane highways and the expansion of the Chicago & North Western 's commuter rail line in

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