Free Articles - Table of Contents
Business Matters
Deducting the Business Use of Your Home
Should You Incorporate Your Business
Human Resources
ADA Protects Employees with Cancer
Update Social Security Number Verification for Employers
The Dangers of Employee Internet Use
The Hazards of Resume Screening
Real Estate
Landlord/Tenant-Insurer May Sue for Fire Damage
Miscellaneous
Good News For Those Who Struggle With Legal Risk
Partnerships And Limited Liability Companies
A Few Well Chosen Words About Contracts
ESOP Talk
An exit strategy is always a concern for the owners of small to mid-sized corporations. Most have no ready market for the shares of the corporation, and are often subject to shareholder buy/sell agreements for which the liquidity to comply does not exist. An Employee Stock Ownership Plan, more commonly referred to as an “ESOP”, often provides the best solution to this quandary. An ESOP allows the owners of the business to sell their shares to their employees in a tax advantaged method that also provides an incentive for the employees to perform prior to the sale. Owners of small business should consider implementing an ESOP well before the optimal time for exiting from the business.
An ESOP is either a qualified stock bonus plan, by which employees receive stock as a bonus, often based upon performance, or a combination of stock bonus and money purchase plan, designed to invest primarily in the stock of the corporation. That stock can be newly issued from the corporation, or it can be stock held by current shareholders. In either case a trust is set up to purchase and hold the shares of stock, which are allocated to employee accounts. The purchase of the shares provides liquidity to the corporation or to the shareholders who sell their shares to the ESOP. A leveraged ESOP will borrow money either from the corporation or another qualified lender to purchase of large block of the employer’s stock, and shares are allocated to employees as the loan is repaid.
An ESOP will not only provide liquidity to exiting owners in situation where there is no ready market for the shares, but it also provides several significant tax advantages. If the ESOP is leveraged via a loan from a third party, the employer will ultimately receive the funds, and it is as if a loan was made to the employer. The employer’s annual contributions for repayment of principal and interest on the loan are deductible up to 25% of the annual compensation of the participants. Dividends, which are not normally deductible by the issuing corporation, may be deducted if the dividends are paid in cash directly to the participants of the plan. Under certain circumstances, a shareholder’s sale of stock to an ESOP is eligible for deferral of capital gains tax on the proceeds.