What is an ESOP?
An ESOP is a qualified defined-contribution employee retirement plan that can be used to purchase the stock of the sponsoring company. These plans have notable benefits for employees and owners alike, but companies must take care in how ESOPs are structured, implemented and managed to ensure that the ESOP is in compliance with ERISA rules, as the plans are overseen by both the Department of Labor and IRS.
Who should consider an ESOP?
An ESOP may be worthwhile to consider for many business owners. Each business needs to work with their counsel to determine whether an ESOP is a viable option for their company.
An ESOP that is well-designed and planned, can help a business that may be faced with:
- business succession issues
- shareholder liquidity issues
- the desire to decrease financing costs
- the need for additional tax advantages
- maintaining current key employees
- the desire to enhance the dedication and performance of employees
Why are ESOPs growing in popularity?
As the name suggests, ESOPs give employees a stake in their company’s success. ESOPs also have significant benefits for owners who have private, closely held company stock and are interested in selling the company at fair market value, typically without a negotiated discount.
An ESOP creates a ready-made market with no third-party buyer required. Sellers can receive cash up-front and retain day-to-day operational control of the company until “cashed out,” or they can opt to sell over time to diversify and ease out of the business gradually.
Perhaps most important, ESOPs can offer substantial tax benefits, depending on the structure of the sponsoring organization.