Employee stock plans are based on a bright future Financial strategy leads to success.
For half a century, thousands of American businesses have enjoyed significant tax savings and cash benefits as sponsors of Employee Stock Ownership Plans. Many?
While federal statistics are two to three years out of date, there are currently more than 12,000. While the majority of ESOP sponsors are closely held private companies with 25-150 employees, there are many large, high-profile public companies, such as Peoples Supermarkets and Home Depot.
As reported earlier this year, Bernard Marcus, co-founder of Home Depot, announced that Home Depot “created more than 1,000 millionaires” in 1997.
– That’s how it is. Many of the people who wear long orange aprons are (billionaires).
Many business owners choose to sell some or all of their business to employees and, in doing so, turn corporate and personal taxes into tax-free capital gains for themselves.
The ESOP horizon remains very bright and Congress continues to expand the qualification for ESOP sponsorship.
Starting this year, Subchapter S corporations are also qualified ESOP sponsors. This represents unique opportunities for S corp owners. As an example, many C corporation owners sell their business to their ESOP and thus avoid all capital gains taxes. Subsequently, the switch to an S corporation avoids all future corporate income taxes.
Why are more than 11,000 companies sponsoring an ESOP? Because the ESOP is the mechanism with the greatest tax advantages for business owners to achieve very profitable objectives.
First, you now have a willing buyer for part or all of your business and pay no taxes. Second, you can have the most profitable plan to motivate employees to give you their best efforts. After all, who works harder, the owners or the employees?
Suffice it to say that over the past 30 years, studies by both federal agencies and the private sector conclude that, without question, ESOP companies are significantly more profitable than their counterparts.
An ESOP is an employee benefit plan that operates through a trust that accepts tax deductible contributions from the company to purchase shares in the company. As mentioned above, the person who sells does not pay taxes. Think how powerful this advantage is for business owners. The business is purchased with tax deductible dollars and the seller does not pay taxes.
The ESOP can acquire new and existing shares. The ESOP trust can also borrow money.
Using an ESOP to borrow money is another great cash advantage and tax saving opportunity for business owners, as when paying off the loan, both the interest and the principle are fully tax deductible.
Congress continues to support the tax savings and cash benefits available exclusively to ESOP companies. Now S corporations, as well as C corporations, are qualified backers.
Every day, business owners fight two battles. Doing it and saving it. The ESOP financial strategy helps win the former and virtually ensures success with the latter.
Myths and realities
The six most common misconceptions about ESOPs:
ESOP myths:
– ESOPs are a gift.
– Shareholders lose control.
– You must disclose financial data to employees.
– My employees cannot pay me what my company is really worth.
– ESOPs are for bankrupt companies.
– ESOPs are forever.
ESOP data:
– ESOPs buy shares in the company.
– Executives maintain full control.
– You are not required to disclose financial data, executive compensation or company value.
– Total market value of the ESOP country.
– Ninety-eight percent of ESOPs are in healthy companies.
– ESOPs can be reversed.
– ESOPs can be reversed.
The Business Journal November 27, 2002
Frank Amato is a Managing Member of Arizona ESOP Group, LLC http://www.arizonaesopgroup.com. He can be reached at (480)222-0199 or (480) 227-3064.
