What are the benefits to an ESOP?

An ESOP provides a benefit for selling shareholders, the company, and its employees.

• Benefits for Sellers: The ESOP allows a seller to be paid the fair market value for their shares of company stock without selling to an outside buyer or investor. This option allows the seller to remain involved with the company in an operations role, if desired. Finally, sellers can take advantage of a special tax advantage called the 1042 rollover. Under 1042, sellers are able to defer paying capital gains taxes on the proceeds of the stock sold to the ESOP.

• Benefits for the Company: A company also gets special tax advantages when it’s ESOP-owned. As an S-Corp, the percentage of the company owned by the ESOP is not subject to federal income tax, and in many states, not subject to state income tax either. This annual tax savings frees up company cash to pay off the initial debt from the ESOP transaction and to reinvest in the business. Companies that are also ESOP-owned may be better able to attract and retain employees now that employees have an additional retirement benefit. By investing in an ownership culture, companies may also receive the financial and cultural benefits that come with employees thinking and acting like owners. For example, at companies where employees are empowered to think and act like owners, the company may have fewer quality issues and better staff engagement, which can flow through to higher profits for the company.

• Benefits for Employees: For employees, the ESOP gives them a stake in the company success through a retirement benefit that they do not contribute their own money to. The longer they work at the company, the more shares they get into their account, and the more time they have to hopefully see those shares appreciate in value. Employees also get to take pride in their work with the company and the way their hard word directly impacts their wealth.