What is an Employee Stock Ownership Plan?

Also known as ESOPs, Employee Stock Ownerhsip Plans are qualified retirement plans that holds shares of company stock on behalf of employees. 

Company shares are valued on a yearly basis by an external appraiser.  When the employee retires or exits, shares are repurchased by the company and proceeds are paid to the employee.

Stoneage manufacturing, esop

Who it’s for

ESOPs are best for:

  • Mid to large profitable companies

  • Owners seeking to maximize tax advantages

  • Owners willing to sell 30% or more of the business to employees

  • Employees who value retirement benefits

How it works

  • Employees receive shares through a trust which is administered on behalf of employees. No upfront cost to employees

  • Shares allocated based on salary or tenure as a retirement benefit

  • Employees receive payout at exit/retirement (with significant tax implications if payout is before 59.5 years old)

  • Regulated as a retirement plan under ERISA

The Benefits

Explanatory overview text about the benefits of transitioning to ESOP

OWNER Benefits

  • Capital gains can be indefinitely deferred

Employee Benefits

  • Employees get a retirement payout

  • Shares go up based on yearly value, and get redeemed when employee exits

  • Optional employee voting rights

Dive deeper on ESOPs

COST

  • $150k- $300k in initial set up, they make sense for larger companies

  • $70k to $125k in ongoing yearly administrative costs 

tax perks

  • Allows selling owner to defer capital gains taxes, if at least 30% of the company is sold to employees

  • Company can deduct, or avoid, income taxes on shares sold to employees

  • Company can avoid paying federal corporate income tax

mISCONCEPTIONS

  • ESOPs often only fit businesses who average $500k in yearly profits, due to high ESOP costs.

  • ESOPs are not guaranteed to stay employee-owned. The trustee’s fiduciary duty to maximize financial returns means the company may be sold to an outside buyer, even if that ends employee ownership

Interested in transitioning to an ESOP?

Fill out the form to get on the waitlist for our next cohort