The BizFilings blog covering business tips and trends.
Considering an Employee Stock Ownership Plan (ESOP)
Published on Aug 18, 2013
When selling a company one of the options to consider is an ESOP, where you sell your company back to the employees through stock ownership.
Selling a business in this economy is no easy feat for company corporations, leaving countless entrepreneurs unsure about how to retire.
Most owners prefer to not sell to a competitor for a low profit, risking the dismantlement of the incorporation, and subsequent layoff of employees in the process. Thankfully, there is another option: sell your business back to your employees, using the Employee Stock Ownership Plan (ESOP).
“Planning to exit a business is about doing one of two things – either restructuring the business or selling it outright,” says Brad Wiewel of The Wiewel Law Firm in Austin, Texas. “With an ESOP you can accomplish both goals and build the company around the very employees that constitute the corporation in the first place.”
An ESOP is unlike any other employee benefits plan, which typically diversifies holdings by investing in a variety of assets. It is designed to provide employees with ownership interest, investing primarily in the stock of the company. Employee ownership in the U.S. is much more widespread than usually understood, with at least 11,000 such businesses in operation across a variety of industries.
The plan is also beneficial for the corporation from a tax perspective. If an owner sells the business outright, profits are taxed as ordinary income. Alternatively, ESOP profits are treated as a capital gain and taxed at a lower rate.
ESOPs Surge in Popularity
ESOPs are becoming a significant alternative as more and more business owners approach retirement. The U.S. Small Business Administration estimates that 30 percent of the nation's business owners are 55 or older. Luckily, Congress sees this. Earlier this year, a bipartisan group of lawmakers introduced a bill promoting ESOPs.
“ESOPs have been a powerful tool in an otherwise soft market for business transfers,” said Wiewel. “Accordingly, ESOPs are worth a good look, and then even a second look, as a unique and proven business succession strategy.”