As a business owner, you are likely concerned with your assets and available funds while also making sure you attract and keep valuable employees. An Employee Stock Ownership Plan, ESOP, may be an option to consider. ESOPs have been growing steadily in popularity over the last several decades. There are some benefits to ESOPs that make them ideal for some companies. However, you want to make sure you understand how they work so you can make a determination of whether an ESOP is right for your company.
How ESOPs Work
ESOPs offer stock ownership for employees. There are several ways you can accomplish ESOPs. Employees can receive company stock as a bonus in addition to their regular salaries, through a profit-sharing plan, or as stock options. A popular way to provide stock is to offer employees the ability to purchase stock directly. An ESOP can be utilized to supplement your employee’s retirement funds.
Before you take the leap, you will want to make sure that an ESOP is right for your company. There are some advantages for your business, but there could also be some drawbacks.
- Benefit for Employees – When you want to give your faithful employees an extra benefit, offering an ESOP might be a great solution. Your employees will be able to add to their portfolios with the addition of stock. At the same time, employees who own stock take a more vested interest in the operation of the company.
- Maintain Control of the Company – Although employees own shares of stock and have some input into the company, you still maintain control of the business through the board of directors. Your managers will still oversee the daily operations and make important decisions that will continue to impact the business.
- Deciding Participation – One of the hardest decisions you will need to make when you implement an ESOP is which employees will be eligible to participate. You will need to put guidelines in place before you begin the program. Keep in mind that you want to use the ESOP to reward employees, so you will want to make sure you include those who qualify.
- Tax Incentives – There are some definite tax advantages for companies. The IRS provides some guidance regarding ESOP taxes. ESOP contributions are tax-deductible on up to 25% of the pay of participants of the plan. When the company borrows money to purchase shares, a portion of the repayment on the principal is deductible. ESOPs offer tax-free savings to participants until they take out their benefits.
How to Start an ESOP
When you decide to start an ESOP, you will want to consult with an experienced attorney. There are many decisions to make, and the type of business you have will make a difference in setting up the ESOP. Generally, a trust is set up to buy company stock. Your business will make contributions, which are typically tax deductible. The trust then allocates shares to employees. Employees become vested after a specific number of years, depending on the method of vesting you utilize. You will need to create a plan for how employees qualify for the ESOP.
An ESOP may be a great way to give something extra to employees. You will want to understand the plan and the impact it will have on your business before you begin. To learn more, contact our employment law attorneys at Moen Sheehan Meyer, Ltd. at (608) 784-8310 or online.