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The Benefits of Being an Employee Owned Company

Posted by Paul D. Woodard | Oct 30, 2017

An Employee Stock Ownership Plan (ESOP) is a qualified defined contribution retirement plan that primarily invests in common company stock. These shares are held in an ESOP trust until the employee leaves the company or retires. At that point, the shares are bought back by the company.

Many closely held companies are converting to employee-owned companies to take advantage of a number of unique benefits. This includes benefits to the business owner, employees, and to the company. However, business owners considering ESOPs should weigh the benefits and drawbacks of employee ownership to determine if an ESOP is their best option.

ESOP Benefits for Employees

As an employee, an ESOP is a retirement savings plan that provides financial benefits after they leave the workforce. However, one of the most unique benefits of an ESOP is that it gives workers a stake in the success of their own company. An employee has a personal interest in seeing that their work benefits the company, which also results in greater job satisfaction.

ESOP Benefits for the Company

The company itself may also benefit from employee engagement. Companies with employee ownership often see greater productivity, higher profitability, and increased revenue. These successes also tend to continue over time, as the motivation of employees continues as long as they have an interest in the overall health of the company.

ESOP Benefits for the Selling Owner

For a small business owner, selling a company or preparing for succession can be unpredictable. However, selling the company to an ESOP can provide stability, predictability, and a smoother transition for the company and company leadership. For example, the ESOP provides the selling owner with a buyer ready

to purchase the company at fair market value. In addition, the owner can also sell shares over time to ensure the owner maintains a certain level of control over the business, which also gives vendors and clients confidence in the future of the changing face of the company. Lastly, as an employee-owned company, the owners can take comfort in knowing that the company they built will not be gutted and sold off by a new owner. Dedicated and valued employees will have continued job security and the company can maintain their corporate values instilled by the founders.

ESOP Tax Benefits

There are also tax benefits associated with ESOPs for the company and participants. Employer contributions are generally tax-deductible, up to 25% of payroll. Companies may also be able to deduct reasonable ESOP-held stock dividends. During the transition process to an ESOP, the company may be able to use pre-tax money to purchase stock from the owners, while the seller can defer their capital gains on the sale.

In addition, employees can defer taxation on their ESOP stock interests until they begin to receive distributions. An employee may also be able to roll-over their ESOP distributions into an IRA, and further defer taxes until the money is withdrawn.

If you have any questions about how converting to an ESOP would benefit your company, the law firm of Butterfield Schechter LLP is here to help. We are San Diego County's largest law firm focusing its law practice on employee benefits law. Contact our office today with any questions on how we can help you and your business succeed.

About the Author

Paul D. Woodard

Paul Woodard practices in the areas of Employee Benefits, Employee Stock Ownership Plans, Pension and Profit Sharing Plans, ERISA, ERISA Litigation, Business Law, Qualified Domestic Relations Orders (QDROs), and Estate Planning.


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