Company owners face many decisions when it comes time to transition responsibilities and ultimately ownership to the next generation. For those owners who wish to sell their shares gradually and transition out of their responsibilities over a period of years, an Employee Stock Ownership Plan (ESOP) might be the right fit. An ESOP is a qualified defined contribution employee benefit plan that primarily holds the employer company’s stock. An ESOP functions similarly to a stock bonus plan that provides a retirement benefit to employees in the form of the company’s stock. As a “qualified” plan, an ESOP is established by the employer for the benefit of the company’s employees and qualifies for certain tax benefits, both for the company and the selling owners.
Advantages to establishing an ESOP include:
- The creation of a ready market for shareholders to sell their shares
- The ability for shareholders selling to the ESOP to defer capital gain taxes on the sale of shares
- The ability to motivate and reward employees through their ownership in the company
- Contributions to the ESOP are tax-deductible, within certain limits
- S corporation ESOPs are exempt from tax on their portion of corporate income
- Employees do not pay tax on their ESOP accounts until they start receiving distributions (potentially at favorable rates)
An ESOP can provide a variety of benefits to the selling owners and participating employees of a company. However, navigating the world of ESOPs can be daunting. ASL is here to help you understand the pros and cons of establishing an ESOP. We serve numerous ESOP companies operating in industries such as manufacturing, retail, engineering, construction and software.
If you would like to discuss how an ESOP can help accomplish your goals and benefit your company and employees, please contact Jeff Faust, CVA, Director of Valuation Services at firstname.lastname@example.org or 408-377-8700 x232.