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


  1. Creates a known buyer for business owner’s stock, freeing owner’s capital
  2. 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.” 
  3. Owner is paid fair market value for business determined by a Trustee who hires an independent valuation firm
  4. Company receives special tax deductions
  5. The ESOP is a tax-free entity. All income flowing to the ESOP is tax exempt.  
  6. Owners can maintain full control of the company, regardless of what percentage is sold to the ESOP.
  7. Under an ESOP, funds used to buy the company are fully tax deductible, financing accomplished with pre-tax dollars.
  8. Employee, through a trust set up for them, receive equity in the Company, as opposed to 3rd party
  9. Shareholders can sell wholly or in part, and different shareholders can sell different amounts of shares.


  1. Regulatory Oversight by DOL and IRS
  2. ESOP cannot pay more than fair market value
  3. Requires ongoing administrative costs, including annual valuation, legal and trustee fees
  4. Lenders only finance a portion of the purchase price, seller notes cover balance
  5. Complex Deal process

 To learn more, go to or contact me, directly Darren Gleeman to learn more:

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