Employee Stock Ownership Plans (ESOPS)
The concept of involving employees in the ownership of a company through an Employee Stock Ownership Plan ("ESOP") was developed in the 1950s by Lewis Kelso. However, the idea never got off the ground until 1973, when Mr. Kelso gained the support of Senator Russell Long (chairman of the Senate Finance Committee). Then in 1974 the tax deductible provisions of an ESOP were encompassed in the Employee Retirement Income Security Act (ERISA). This newly created legislation provided the framework and guidelines for the use of an ESOP in designing successful succession plans for U.S. privately held companies. The tax benefits created were significant enough to encourage a seller to seriously consider selling to an ESOP. Since 1974, Congress has revised and updated the laws concerning ESOPs. Most notably in the Tax Reform Act of 1984 and 1986, the Small Business Job Protection Act of 1996, the Taxpayer Relief Act of 1997, the Economic growth and Tax Relief Reconciliation Act of 2001, and the Pension Protection Act of 2006.
In the 1980s and 1990s, the employee ownership movement in the United States seemed to be the logical consequence of intensified global competition, volatile energy prices, and deregulation of the domestic marketplace. In the 21st Century, ESOPs continue to be one of the major strategies in succession planning for the owner wanting to transition out of his/her company, or simply diversify to protect the company for future generations. There are an estimated 8.5 million employees in the United States who own shares of their companies through an ESOP.
The Small Business Job Protection Act (SBJPA), passed by Congress in 1997, made it possible for S corporations to have ESOPs. However, it is important to emphasize that S corporation ESOPs do not have all of the tax benefits (as of now) that C corporations have. For example, the tax deferral provisions of Code Section 1042 are not available to a seller of stock to an S corporation. There are other limitations related to deductible limits as well as special ownership limits identified in Code Section 409(p).
Reasons to Consider an ESOP

There are many solid reasons - business and personal - why company owners implement Employee Stock Ownership Plans. By far, the majority of ESOPs resolve a fundamental dilemma: what happens next? Many business owners are facing the issues of how to get value from their company, maintain the business' continuity and growth, and ensure the livelihood of faithful employees and managers.

Consider these benefits of an ESOP transaction:

  • Business Continuity:
    Offers a sound and proven business succession strategy. Keeps a solid company locally owned.
  • Fair Market Value for Your Business:
    Often provides a safer, more realistic transaction than other selling options.
  • Lifetime Income:
    Helps owners to achieve liquidity while still owning control of the company..
  • Favorable Financing:
    Banks will provide loans for ESOP transactions at very favorable rates..
  • Secure Future for Your Employees:
    Rewards key managers and employees by giving them a stake in the company’s future..
  • Tools for Growth:
    Provides means for expanding operations through growth or acquisitions (tax deductible)..
  • Greater Business Productivity:
    It is a proven fact that when you bring employees into the ownership structure, incentive, accountability and productivity increases..
  • Tax Advantages for Owners:
    Capital gains on the sale of stock to an ESOP can be deferred indefinitely (Code Sect. 1042). This provision does not exist, however, for S corporation ESOPs..
  • Tax Advantages to the Company:
    Principal and interest payments on an ESOP loan are tax deductible to the company..
  • Tax Advantages for Employees:
    Same tax benefits as a 401(k) or profit sharing plan. The employee is not taxed on his/her ESOP account until he/she receives a distribution from the ESOP Trust.
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