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Benefits of an ESOP for Family-Owned Companies

Posted by Marc S. Schechter | Feb 28, 2019

Family-owned companies often take pride in the reputation they have built up over the years. However, at some point, the owners may need to step down from the company. The founders may want the next generation to follow in the family business but the majority of family-owned companies only last a single generation. Employee Stock Ownership Plans (ESOPs) can be the ideal option for the succession of a family-owned business.

What is an ESOP? 

An ESOP is a type of qualified retirement plan that invests in company securities. Shareholders of the company sell shares of stock to the ESOP trust. In turn, participating employees are given an interest in the company. When an employee retires, their interest is bought back by the company to provide retirement benefits.

An ESOP provides a unique opportunity for business owners who are looking towards retirement. When a family's name is attached to the company, the owners may not be willing to sell the company to just anyone, especially a competitor. When the owners sell to a third party, they may have no control over what happens to the business and the employees who have contributed to the company's success.

When transitioning a family-owned business into an employee-owned company, the business is put into the hands of the workers who will have a personal and financial interest in the continued success of the company. Additionally, the company may not have a ready buyer who will pay the full value of what the business is worth. An ESOP provides a ready buyer for fair market value.

Another benefit for family-owned companies is the owner can transition control of the company over time. This can also provide peace of mind to vendors, contractors, and employees that the company will continue to operate as before. Statistically, the company will be likely to do better after an ESOP. Studies have shown an increase in employee retention, productivity, and employee satisfaction.

In addition to the goodwill benefits of an ESOP, there are numerous tax benefits for the owner and employees alike. The company contributions to an ESOP are generally tax deductible. For employees, the retirement benefits allow the workers to defer taxation until they receive distributions.  

A number of family-owned businesses in San Diego may be able to benefit from transitioning the company to an ESOP, especially if the owners and founders are considering retiring from the more than full-time job of running a business.

ESOP Law Firm in San Diego

If you have any questions about employee ownership and ESOPs for your California company, Butterfield Schechter LLP is here to help. We are San Diego County's largest law firm with a focus on employee benefits law. Contact our office today with any questions on how we can help you and your business succeed.

About the Author

Marc S. Schechter

Marc Schechter specializes in the areas of employee benefits, ERISA, and business matters.


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