An Employee Stock Ownership Plan ("ESOP") can help private business owners as well as provide a significant employee benefit plan
An ESOP can provide business owners with personal cash liquidity or asset diversification on a tax deferred basis while retaining management control of the business. At the same time, an ESOP creates a significant employee benefit program which is subsidized by very substantial tax and financing advantages. The benefit program creates employee ownership that creates a worker incentive, fosters retention and provides assets for retirement. No taxes are due on the accumulating benefits until the employee receives distributions from the plan.
An ESOP plan allows a company to borrow funds to purchase from 30 to 100% of owners' shares for cash creating liquidity or tax deferred asset diversification for the owners. The company guarantees the loan but due to Congress' interest in assisting the lender receives a tax break on the interest so the loan terms are generally attractive. All payments by the company of principal and interest on the loan are tax deductible to the company as are any dividends on stock held by the ESOP so the government is subsidizing, effectively, half of the payout to the owners. Employees acquire ownership in a share of the ESOP as the loan is paid down but are not taxed until they actually receive distributions from the ESOP, perhaps as part of their retirement income.
If you are interested in confidentially discussing the way an ESOP might relate to your situation please contact us. Avalon Net Worth can assist you explore the benefits and potential negatives regarding this capital alternative. We can assist you move forward to complete an ESOP, working with your company on documentation and arranging for an appropriate lender. If your company is already moving forward on an ESOP we can provide an independent valuation of a fair sale price.
The foregoing is a general summary of a complex tax and accounting program and should not be relied upon in whole or in part. Each transaction requires working with accounting, tax and legal advisers regarding the detailed provisions and the alternatives applicable to each company and owner's situation and the development of appropriate documentation to complete a transaction.