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Emloyee Stock Ownership Plan

An employee stock ownership plan (ESOP) serves as an employee benefit plan and a corporate finance tool. ESOPs help business owners meet a variety of individual and corporate goals, while giving employees an additional benefit that gives them a personal stake in the company's success. An ESOP:

  • Invests primarily in the stock of the employer who sponsors the plan.
  • Can borrow money and have both principal and interest payments may qualify as tax-deductible.
  • Encourages employee ownership but retains management control.
  • May allow 'tax-deductible' dividends.
  • Takes a company private with potential tax benefits.

ESOP Benefits
Benefits for your plan sponsors

The reasons to consider an ESOP for plan sponsors are numerous. ESOPs may:

  • Attract, reward, and retain employees
  • Buy out one or more owners
  • Create a more motivated workforce
  • Raise capital or build debt capacity
  • Provide a takeover defense
  • Establish a market for stock in a closely held business
  • Have significant tax advantages:
    • The ESOP can finance future growth and expansion with pre-tax dollars.
    • In an S corporation, corporate net earnings may be exempt from both state and federal income taxes, to the extent those earnings are attributable to the ESOP.
    • In a C corporation, the company can take a tax deduction for dividends it pays on stock the ESOP holds.

Benefits for Advisors
Setting up an ESOP often creates the opportunity for you to arrange additional financial products and services for your clients. For example,

  • Owners selling to an ESOP must reinvest the proceeds to defer capital gains taxes. The plan sponsor may need to purchase domestic securities to qualify for the special tax treatment that serves as a major incentive for many ESOP deals.
  • Leveraged ESOPs usually involve a loan from an outside lender, allowing you to put the plan sponsor in touch with firms experienced in ESOP financing.
  • Management compensation packages often undergo review when setting up an ESOP. The plan sponsor may be interested in executive compensation packages in addition to the ESOP.
  • ESOP companies must offer diversified investments.

Learn more about ESOP solutions

It's easy to learn more about employer securities solutions:
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