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What is an Employee Stock Ownership Plan (ESOP)?

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Employee Stock Ownership Plans

 

With 6,000 ESOPs covering approximately 13 million employees in the United States, ESOPs are the most popular form of broad-based employee ownership.

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In 1974, Congress created a special program called an Employee Stock Ownership Plan (or ESOP) to allow business owners to sell some, or all, of their company (for full fair market value) to their employees. The employees pay nothing. That’s right. Not a penny. Rather, the business itself takes a loan from a bank or other source to pay the owner(s). 

The federal government and the state of Pennsylvania turn around and say, “If you do this, the company never has to pay tax on profits again, for whatever portion is owned by the employees”. If you sell 100% of your company to your employees, the business is tax-free! The tax savings pays off the bank, and after a few years, the company has lots of extra cash...to grow and to reward the employee owners.

Employee stock ownership plans (ESOPs) are a way to sell a business that benefits the company, employees, and the selling shareholders. Owners can sell all or just a percentage of their business to the employees.

Through an ESOP, employees are given shares in the company (at no cost to them), which are held in a trust and distributed after the employee leaves the company. In many cases, employees have retired with ESOP accounts worth hundreds of thousands, and even millions of dollars, in addition to their 401(k) and other retirement benefits.  

ESOPs are a unique type of plan that can also be used as (1) a flexible, tax-advantaged tool for business succession, (2) a way for the owner to take some money off the table, (3) a way to create an internal market for company stock, (4) a retirement plan that holds company stock in a trust for the benefit of employees.

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