The ESOP Basics

 

  • ESOP stands for employee stock ownership plan. It is an employee benefit plan that gives workers ownership interest in the company; this interest takes the form of shares of stock. An ESOP is a qualified plan because it gives the company and participants tax benefits. Employers often use ESOPs as a corporate-finance strategy by getting everyone in the game as a team—stakeholder and employee vying together, unified under a common goal.

  • You will need to be a C or S-corporation. ESOPs can only be used in C- or S-corporations.

  • Your company must be a C- or S-corporation.

    You will need a certified valuation analyst. If you do not have a certified valuation analyst, we can set that up.

    You are required to provide documents to your employees, which include Summary Plan Description, Summary Annual Report, Individual Benefit Statements, and Plan Documents. You are NOT required however to provide your company’s financial statements, tax returns, officer salaries or ESOP share ownership structure. Your employees can share in the ownership without being privy to every intricate detail of the company.

  • Tax. Enjoy the possibility of beefy federal income tax breaks. Deductible ESOP contributions, tax-free earnings along the way and if the ESOP borrows money, repayment interest is tax deductible as well as principle up to a percentage.

    Legacy. A way for owners to pass the baton much quicker than an external sale, while leaving it in the very capable hands of the people who helped build and sustain the company..

    Foster ownership. Giving employees the opportunity have a stake in the company, they can have a direct correlation of their efforts to improve the business to their wealth growth. ESOP adds value to those who add value.

  • There are 2 types of ESOPs, each with its own various strategies. It is important to harness the power of the right ESOP to accomplish your intended goals.

    Leveraged and Non-leveraged

    Scroll on for more details.

Two Types of ESOP

  • Leveraged.

    Leveraged ESOPs are typically used for estate and succession planning or to grow the business. One method is the financing is used to buy stock from a selling shareholder while another method allows the ESOP to use financing to acquire newly issued shares from the company. Think tax advantaged financing for purchasing capital goods, expanding via merger and acquisitions, or increasing capital formation.

  • Non-leveraged.

    Funded by contributions of cash or stock directly from the company, a nonleveraged ESOP is established to promote growth of the company by improving cash flow and reducing taxes. The purpose of the ESOP can be to purchase shares from a shareholder on a cash flow basis. Using a non-leveraged ESOP will also avoid the impact of debt on the corporation’s value and balance sheet. Typically easier to manage than with the leveraged variety since repurchase of stock is on a cash flow basis.

Explore with an expert.

 

I am Curious.

If you are exploring ESOP as an option for your company, we can determine if it will work in your great favor and give you things to consider. Save yourself the researching time and let us give you quick answers on everything you need to know.

 

I have an ESOP.

If you have an existing ESOP with another provider and think it may not be working as well as it should, it’s a good time to peer into it to see what things could change or if it no longer fits your business. We are happy to help you understand what to look for so you can communicate with your provider. Get answers from our strategists.