Employee stock ownership from three perspectives: What you need to know...in a nutshell
An Employer Stock Ownership Plan (or an ESOP) can be an attractive option for closely-held business owners who are evaluating succession planning options. An ESOP can provide unique benefits to you as a selling shareholder, your employees, and your company. All three parties should really be considered to determine if an ESOP is a good fit.
An ESOP is a qualified retirement plan. It's very similar to a 401(k), only it invests primarily in that employer's stock.
As an owner, that creates an available market for you to determine when and what percentage you would like to sell. An ESOP can also mean a smaller likelihood of the company dynamics changing with an ownership transition. Additionally, an ESOP can provide a C corporation shareholder the opportunity to defer tax on any gain on the sale, if certain requirements are met.
For employees, an ESOP is usually an additional retirement benefit on top of other diversified accounts.
According to Department of Labor research, ESOP accounts on average have a higher rate of return, are less volatile, and are typically more inclusive than 401(k) plans. Plus, an ESOP can even increase employee engagement and loyalty by giving employees a stake in the business.
Finally, the company benefits. Contributions are a tax-deductible employee benefit expense and with proper communication, ESOPs can be great for morale.
For one, your company should have good profitability and growth potential to ensure that the ESOP can be funded and that it provides a valuable benefit to employees.
Having qualified management who can support employee ownership and who will be prudent with respect to compliance matters is important. Of course, company culture and the demographics of your employee base need to be right.
These are all things we can discuss to determine if an ESOP is a good choice for your business.