The ESOP Advantage
As you were growing up, your mother probably told you “You can’t have your cake and eat it too”. Well, Mom was wrong!
By utilizing an Employee Stock Ownership Plan (“ESOP”), business owners can sell their businesses to a retirement plan for the benefit of their employees and still maintain control of the business while reaping substantial tax benefits.
An ESOP is an employee benefit plan that allows shareholder(s) of a closely held corporation to sell their stock at fair market value to a retirement plan, enjoy numerous tax advantages and the shareholder(s) retain control of the day-to-day operations of the business.
Where else can you sell an asset and still effectively maintain control of the asset while maintaining an income stream from its operations? By utilizing an ESOP, shareholder(s) can sell their stock to a retirement plan for the benefit of their employees but stock voting rights only pass through to the underlying employee participants on certain specified issues which do not effect the day-to-day operation of the company such as election of officers and directors. After the sale, shareholder(s) can still be compensated for the services they perform for the company.
There are numerous tax advantages of selling corporate stock to an ESOP, such as:
- Selling shareholder(s) can defer indefinitely the capital gains on the sale of stock to an ESOP
- The repayment of debt (both principal and interest) can be deductible for income tax purposes
- In certain circumstances, to the extent the company stock is held by an ESOP, the earnings of the company are not taxable
- Dividends paid to an ESOP can be tax deductible
Where else can a seller realize a capital gain and not have to pay the tax while the purchaser gets to deduct what it paid for the asset and in some instances its income from the assets operations are not taxable?
There are a number of reasons that an increasing number of companies are considering forming ESOP’s, such as:
- Employee motivation
- Financing solutions
- Succession planning
- Business continuity
- Retirement planning
Is an ESOP right for a specific company? At EGP, PLLC were are experienced in assisting companies in evaluating whether an ESOP is the right business model for a closely held enterprise and have assembled a team of professionals who can assist companies in an ESOP transaction from beginning to end. If you have an interest in finding out more about ESOP transactions, please contact Randy Patterson at 501.374.2910 or at rpatterson@egpcpas.com.
