Employee Stock Ownership Plans: Innovative and Tax-Efficient Tools to Meet Business Planning Needs


You may have heard of them, but may not fully appreciate or understand how an Employee Stock Ownership Plan or “ESOP” could help you meet your business planning goals.

An ESOP is something to consider if you are:

  • A business owner with no family members or partners in line to take over the business;
  • Interested in incentivizing employees by giving them a stake in the business; and/or
  • Looking for ways to defer capital gains taxes on the sale of your company stock.

Infographic - Have you Considered an ESOP?

ESOPs are a type of tax-qualified retirement plan just like a 401(k) or profit sharing plan, except that they are invested primarily in employer stock. After an ESOP is formed by a company, the ESOP can purchase company stock from one or more selling shareholders.  This enables employees to succeed to business ownership and receive the benefit of company growth, without directly issuing or selling them shareInfographics.

If certain requirements are satisfied, the selling shareholder can reinvest the proceeds from the sale in other qualifying securities to defer tax gain.  The company sponsoring the ESOP also can finance the ESOP’s purchase of shares on a fully tax-deductible basis, subject to tax law limits.  These tax benefits, plus the existing owners’ ability to retain control over the company, make the establishment of an ESOP very appealing.

The ideal ESOP candidate is a company having earnings before interest, taxes, depreciation and amortization or “EBITDA” in excess of $2 million, at least 15 non-shareholder employees, and a payroll of at least $1 million.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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