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Employee Stock Ownership Plans, or ESOPs for short, are gaining momentum as \u201cbaby boomers\u201d, who are turning age 65 at a rate of 10,000 per\u00a0day for nearly the next two decades, look to retire. Many owners are looking to transfer their businesses to the next generation or key management, but do not wish to\u00a0give<\/em>\u00a0the business away. And the next generation often cannot afford to pay, or even borrow, the purchase price.<\/p>\n Many owners find that an ESOP may be the ideal solution to their liquidity and succession needs. Sale proceeds of a proper ESOP structure may not be subject to the capital gains taxes normally due on a sale of a business and 100% of future profits become federal and state income tax exempt. Therefore, an ESOP is one of the best and most tax-efficient ways for a business owner to transfer a business and often it provides the most \u201cnet\u201d after-tax proceeds to the seller than any other transfer method.<\/p>\n In practical terms, an ESOP is a highly tax-advantaged, immediate, or gradual exit strategy, for a business owner desiring totally liquidity or to simply take some \u201cchips of the table\u201d.\u00a0 The ESOP is a \u201cready and willing\u201d buyer of the seller\u2019s stock that keeps out unrelated third parties and allows corporate control to remain unchanged. It retains the seller\u2019s existing perks while providing significantly enhanced retirement benefits to all eligible employees who will have a beneficial ownership interest in the stock sold to the ESOP.<\/p>\n Technically, an ESOP is a defined contribution, tax-qualified retirement benefit plan under Internal Revenue Codes 401(a) and 4975(e)(7) and overseen by the Internal Revenue Service and the U.S. Department of Labor designed to invest \u201cprimarily in employer stock\u201d.<\/p>\n Typically, either\u00a0the ESOP borrows funds from a bank or the seller takes back a note, or a combination of both.\u00a0The ESOP uses the loan proceeds to purchase some or all of the owner\u2019s stock.\u00a0The company then makes annual tax-deductible contributions to the ESOP, which uses the funds to repay the loan.\u00a0The shares purchased by the ESOP are allocated to the employees over a period of years.<\/p>\n ESOPs have been studied in depth for nearly 40 years. These studies have proven that ESOPs can dramatically increase company performance in many key areas. They foster an \u201cownership culture\u201d in the company, which can make employees feel and act more like owners and less like employees, but without giving away control. Even in a 100% ESOP-owned company, control can be maintained or designated to family or key management by the seller, regardless of the amount of stock sold to the ESOP. Since many owners want their children and\/or key management to eventually run and own the business, but those individuals cannot afford to purchase the business nor obtain adequate financing, proper structuring can increase direct ownership to the next generation, over time without personal financing.<\/p>\n An ESOP is a ready and willing buyer and highly tax-advantaged business transition tool that is often overlooked due to perceived complexity or lack of knowledge. An ESOP may be the ideal method to transfer a business, on the seller\u2019s timetable, to the next generation, without the interference and costs of outside parties. Before selling the business outright or submitting to the terms of private equity firms, business owners owe it to themselves to explore the lesser-known yet powerful ESOP option.<\/p>\n Dan Lynch<\/a> routinely helps business owners with the transition of their business. Please contact Dan if you have questions about ESOPs or other business transition strategies. You can reach him by calling (724) 776-8000 or via email at dlynch@archive-lynchlaw.pfgsandbox.com.<\/a><\/u><\/p>\n Employee Stock Ownership Plans, or ESOPs for short, are gaining momentum as \u201cbaby boomers\u201d, who are turning age 65 at a rate of 10,000 per\u00a0day for nearly the next two decades, look to retire. Many owners are looking to transfer … Employee Stock Ownership Plans Defined:<\/h3>\n
How an ESOP Works:<\/h3>\n
Seller Advantages:<\/h3>\n
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Corporate Advantages:<\/h3>\n
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Employee and Community Advantages:<\/h3>\n
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Corporate Performance and Control:<\/h3>\n
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Pittsburgh Business Succession Planning Attorney<\/h4>\n
This article was originally written by Daniel M. Zugell, who is an occasional guest blogger for The Lynch Law Group and Senior Vice President of Business Transition Advisors, Inc.<\/a>, a national ESOP and business transition consulting firm.<\/em><\/h5>\n","protected":false},"excerpt":{"rendered":"