What is an ESOP (Basics for Business Owners)
What do you need to know about employee ownership (ESOP)?
An employee stock ownership plan (ESOP) can be a great alternative for clients looking to transition ownership of their business. So what is an ESOP? In basic terms an ESOP is a type of qualified retirement plan. Invested primarily in employer stock, an ESOP can provide some unique benefits to both the owners and the business.
For owners, one appeal of an ESOP is the ability to achieve greater flexibility over how and when they transition the business. An ESOP can do this by generating liquidity for the owner along with some potentially tax benefits for both the owner and the business. The owner can also preserve his or her legacy by keeping the business intact and jobs in the community.
Beyond the owner benefits, an ESOP can also help a business:
Create a more tax-efficient business
Provide employees a retirement benefit
Raise capital or build debt capacity
Encourage employee ownership and engagement
How to set up an ESOP
When a business owner(s) decides they’re ready to set up an ESOP, the company first forms a trust and establishes the retirement plan. Next the company can obtain financing and lend the proceeds to the ESOP trust to buy out all or some of the owner’s shares. (This is optional.)
Each year the company would transfer contributions to the trust. In turn the trust uses the contributions to repay the loan. As the loan gets repaid, the shares are allocated to employee accounts based on the plan. If an employee with an account balance leaves or retires, his or her shares can be redeemed for cash.
Get started
Similar to other succession planning options, you’ll need to rely on experts to help you assess and implement an ESOP for your clients. We’re here to help. E-mail our Advisor Support Team or call 800-952-3343, option 2.