An ESOP allows employees, without any out-of-pocket investment, to buy out wholly or in part, the owners of the company for which they work. The owners receive massive tax benefits, and the company, if owned 100% by the ESOP is completely tax-free.
Some History
- In 1974, Congress creates the Employee Stock Ownership Plan (ESOP)
- ESOPs are allowed to borrow money, and use the company’s balance sheet to do it.
- In 1986, Congress allows 100% tax deferral on the gain
- In 1997, Congress allows S Corporations to become ESOP, ushering in a completely tax free company
Pros
- Creates a known buyer for business owner’s stock, freeing owner’s capital
- Selling owners pay no immediate (or perhaps zero) capital gains taxes if they elect to do a 1042 deferral. This occurs if they reinvest their gains in “qualified replacement property.”
- Owner is paid fair market value for business determined by a Trustee who hires an independent valuation firm
- Company receives special tax deductions
- The ESOP is a tax-free entity. All income flowing to the ESOP is tax exempt.
- Owners can maintain full control of the company, regardless of what percentage is sold to the ESOP.
- Under an ESOP, funds used to buy the company are fully tax deductible, financing accomplished with pre-tax dollars.
- Employee, through a trust set up for them, receive equity in the Company, as opposed to 3rd party
- Shareholders can sell wholly or in part, and different shareholders can sell different amounts of shares.
Cons
- Regulatory Oversight by DOL and IRS
- ESOP cannot pay more than fair market value
- Requires ongoing administrative costs, including annual valuation, legal and trustee fees
- Lenders only finance a portion of the purchase price, seller notes cover balance
- Complex Deal process
To learn more, go to www.mboventures.com or contact me, directly Darren Gleeman to learn more: dgleeman@mboventures.com