Employee Stock Ownership Plan Basics

Lots of tax advantages are given by the ESOPs, which means Employee Stock Ownership Plans. This is basically a retirement plan by which a trust would get the stock of the employer in trust for the employees.

Basically, the ESOP trust will buy the employer’s stocks from the shareholders of the employer or the employer itself. It will get the stock by means of getting a bank loan which is then guaranteed by the employer. Basically, the employer is oblige to make yearly deductible cash distribution into the ESOP which the later will make use to pay the loan. Furthermore, the employee stock ownership plan will have to distribute the shares of the stocks of the employers to employees based on the requirements of plan distribution.

Nevertheless, the ESOP is also profitable over the other stock purchase mechanism due to the fact that the tax obligation of employees is deferred until the time when the employee decided to sell the employer’s stock. The employee does not necessarily pay tax during the moment of the employer’s cash distribution or in case the stock is distributed from the plan. Nonetheless, the employer will still get current deduction for all the cash contribution to the plan.

But like any other kind of plan, the employee stock ownership plan has its own set of disadvantages too. First of all, there is a need for the employer to comply with several ERISA requirements that are given upon retirement plans. The said requirement basically relate to those people who must be covered, how much is really funded, when is the time that participants are vested, disclosure, reporting and a lot more. With this, making as well as maintenance of the plan will surely cost a lot.

Furthermore, the adoption of the employee stock ownership plan would imply the need to share ownership with your corporation which will again create a potential problem.

The ESOP will not give a market for stock. With this, in case you wish to sell your corporation and not really share ownership then going for this should be given another consideration. You can probably get cash payment for your entire stock. Surely, the payment will be taxed at a capital gain rate. Before you adopt an employee stock ownership plan in order to buy your whole interest, you can first consider a deal of business to a third party.

Because of this, it is a must for you to understand every aspect of employee stock ownership plan before you decide to go for one. Be mindful to every transaction that you enter because you will never know what its consequence would be in the end. In view of this, it is important to ask around first.

3 thoughts on “Employee Stock Ownership Plan Basics

  1. You provide an excellent summary of the basics of an ESOP. I might only add a bit of narrative to help describe the ideal candidate for an ESOP. They are typically a business owner who has built the business in one generation and wishes to keep the ownership among the current management. An ESOP is effective to permit the owner to exit the business while retaining the essential character of the business and ensuring its stability.

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