ELECTING SMALL BUSINESS TRUST (ESBT)
Back to GlossaryDefinition
A trust that may make an election in order to own stock in a S corporation.
Summary
An Electing Small Business Trust (ESBT) is a special type of trust that has made a formal election with the IRS to be eligible to own shares in an S corporation. This election is necessary because S corporations have strict ownership requirements - they can only have certain types of shareholders. By making the ESBT election, a trust becomes a qualified S corporation shareholder, allowing it to hold S corp stock while maintaining the trust structure for estate planning or other purposes. The trust must meet specific requirements and file the election within certain time limits.
Usage Context
Understanding ESBTs is important when studying business entity taxation, estate planning strategies, S corporation compliance, and trust taxation rules.
Common Confusions
- Confusing ESBT with QSST (Qualified Small Business Stock Trust) - both can own S corp stock but have different rules
- Thinking any trust can automatically own S corp stock without making an election
- Not understanding that the ESBT election affects how the trust is taxed
- Assuming the election is permanent when it can sometimes be revoked
