Employee Stock Ownership Plans (ESOP's)
An ESOP is an alternative option to sell your business with the ability to defer taxation on any gain resulting from the sale of the shares. An Employee Stock Ownership Plan (ESOP) is a tax qualified, defined contribution employee benefit plan designed to purchase primarily employer stock. For the employee, they acquire their stock ownership as a tax-free benefit out of the earnings of the company.
ESOP's are complex benefit plans that are subject to numerous legal and regulatory rules, including ERISA's prohibited transaction and fiduciary rules. We, at Morningstar, have found this process can only be handled by specialists and, for many of our clients, a corporate attorney will not have the expertise to execute this for their client. We have partnered with ESOP attorneys throughout the Southeast in order to give our clients the professional services to advise them regarding who must benefit under the plan, what responsibilities you will have to the plan participants and how to comply with regulatory requirements.
Scenarios where we would review an ESOP alternative:
- Insufficient amount of buyers for the business
- Shareholder buy outs, where one or more shareholders exist
- Owner wishes to sell his/her business to the employees
- Owner seeking to be compensated for their stock while
maintaining control
- Owner seeking to raise capital for reinvestment into the company with
unique tax advantages
Necessary Ingredients for an ESOP:
- Your company must be profitable
- The company should have enough employees that the compensation
base allows for large enough annual contributions to pay down stock
purchase indebtedness in a reasonable amount of time.
ESOP advantages:
- Motivates employees because they feel they are getting "a piece of
the rock".
- Corporate acquisitions.
- Estate planning.
- In conjunction with a 401(k), allow for matching contributions in
company stock
