What is an ESOP trust?

In the 1970s, politicians across the United States were concerned that when a business owner didn’t have a good path forward for selling their business, that business would either shut down or leave the community. They thought employee ownership could be a way to keep businesses going for multiple generations and allow millions of workers the opportunity to build wealth through employee ownership. But they also recognized the constraints to this vision- that there weren’t available legal structures of financing tools for large numbers of employees to take over a business.

At the same time, Congress was focused on establishing rules and regulations for retirement plans. And this is where the idea of the ESOP emerged - a retirement plan that would primarily hold shares of company stock instead of cash investments.

In an ESOP-owned company:

• Shares of company stock are held in special entity called a trust, which is a type of entity set up to hold assets (in this case, shares of company stock) for a beneficiary.

• The beneficiaries of the trust are the employees of the company. They are allocated shares of company stock over time. This stock sits in their retirement account for them to cash out when they left the company.

• The trust is allowed to borrow money to purchase stock on behalf of the employees, instead of having employees contribute their own money.

• The trust is the legal shareholder of the company, in proportion to the percentage of company stock that’s in the trust.

• The trust has a designated trustee. The trustee acts as a buyer of company stock and oversees the trust on behalf of the trust and ESOP participants.