How to Transfer Your Company to Employees With an ESOP

According to the National Center for Employee Ownership, there were about 7,000 employee stock ownership plans covering about 14 million employees in 2017.
Other business owners use ESOPs as a supplemental employee benefit plan for employees or to borrow tax-advantaged money. Closely held companies sponsor the vast majority of these plans, while public companies sponsor only 3% of them.
Typically, employee equity builds gradually through an ESOP. Although business owners may use an ESOP as a long-term way to transfer business, it may also serve as a short-term vehicle to buy out a partner’s shares. And because owners are also employees, they enjoy the same tax advantages of a qualified defined contribution retirement plan as their employees.

Game Plan

  • Take your time. Weigh in an ESOP against other qualified retirement plans. Compare selling your company through an ESOP to selling it on the open market.
  • Decide whether your company owners or the ESOP will retain majority control of the business. Over 70% of ESOP Association member companies are majority-owned (51% or more) by ESOPs. You can also structure the plan to ensure that principals remain majority owners.
  • Do your homework. Before making your final decision, understand the costs, compliance, administration and other factors that go into setting up and maintaining an ESOP.
  • Learn about other transition options here.
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