More Information About ESOPs
An employee stock ownership plan (ESOP) is an employee-owned structure providing employees an ownership interest in the company sponsoring the plan.
The ownership interest can range from a small minority interest to 100% of the company’s stock, depending on the objectives of those establishing the plan.
An ESOP is a Qualified Retirement Plan, specifically a defined contribution plan, and is governed by both IRS and Department of Labor rules and regulations. The IRS naturally is interested in the taxation issues involving the creation of the plan, while the Department of Labor seeks to ensure that the employee participants of the plan are treated fairly and are well represented.
Three reasons a company may desire to establish an ESOP:
1| To provide a way for a departing owner of the company to sell their shares in a tax-efficient manner.
– If the ESOP plan owns 30% or more of the stock of a C corporation, the selling owner may defer taxation on the sale of stock to the plan if he reinvests the proceeds into qualifying replacement securities.
2| To enhance the esprit de corps of a company by providing a supplementary benefit to employees and making them part owners.
3| To create a means to borrow funds for capital use in a tax-preferred manner.