iStock1552122-XSmall-diverse-office-workersSummary Overview

  • An ESOP is a highly tax-favored way for employees to share ownership in their company through a trust fund.
  •  Companies make tax-deductible contributions to the ESOP, and those contributions are either allocated to participant accounts or used to repay the ESOP loan.
  • When a portion of the loan is paid, a portion of the shares is allocated to participant accounts.
  • ESOPs allocate shares to each eligible employee every year, giving employees and increasing ownership stake as they accumulate seniority.
  • The ESOP distributes these shares to employees, usually sometime after they leave the company, so they can use them to fund their retirement.
  • All ESOP rules balance two competing interests: that they are flexible enough so the employers will be willing to set them up, but not so flexible that they are easy to abuse.
  • An ESOP company is worth what a willing buyer would pay for the company to have the right to its future earnings and current assets.

An ESOP (Employee Stock Ownership Plan) is an employee benefit plan that invests primarily in employer stock.

Advantages of ESOPs:

  • Tax-advantaged (to seller, company, employee)
  • Company makes tax-deductible contributions of stock or cash to buy stock.
  • Stock is allocated to accounts for individual participants.
  • Participants receive stock or its cash value on retirement or termination of employment.
  • Employees vote stock through a trust.

6 Reasons to Consider an ESOP

  1. Workers can control the future of their jobs.
  2. The selling owners can get a fair price for their stock.
  3. The company can write off the expense of buying the seller’s stock.
  4. A Sub-S company’s ESOP pays no federal income tax.
  5. The seller’s proceeds from an ESOP stock sale may be tax-free.
  6. Sale to an ESOP can preserve the company’s independence and reward the people who made it a success.

Click here for more detail on these reasons.

Best Uses of ESOPs

Most Common Uses for ESOPs03-skylouver2_10212139906_l

ESOP Varieties