ESOPs typically are stablished as a corporate financial strategy. Also called a stock purchase plan, this is a trust fund created to allocate company shares to employees. Employer contributions to the plan are tax-deductible, and employees do not pay taxes on their shares until distribution. The employees receive the money when they leave the company or at retirement without penalty.
The employer determines the number of shares each employee is eligible for, based on pay scale or length of service, for example, and allocates those to individual accounts. Employees accumulate shares throughout their employment. When they leave, the employer is obligated to buy back the shares at market value.
Benefits:
•Employees with ownership are motivated to stay with the company and optimize performance, as they have aligned interests with the long-term goals of the organization
•Employees are not taxed on shares until they leave the company or retire. They can, at any time, sell shares back to the company, the open market, or roll over to an IRA
•Ownership plans can be attractive to new recruits
•Tangible employee contributions increase corporate value
• There are tax advantages for employees and the corporation
Disadvantages:
•The cost of establishing an employee stock ownership plan is substantial
•Partnerships and most professional corporations are not authorized to set up an ESOP.
If you are considering this type structure for your business, it is essential that you do so according to the company’s abilities and shareholders’ needs.
Consult with your trusted legal, financial and administrative advisors to explore and tailor a ESOP that meets the needs of the shareholders, and is sustainable and creates value for the business.