Employee Stock Option Plans─Benefits to Owners and Employees
An employee stock ownership plan (ESOP) is a qualified defined-contribution employee benefit (ERISA) plan designed to invest primarily in the stock of the sponsoring employer. Since the employer and participants receive various tax benefits, ESOPs are regarded as qualified. ESOPs are often used as a corporate finance strategy or liquidity tool, as well as a way to effectively align the interests of employees with the company's shareholders.
ESOPs offer a wide range of other benefits including:
- Higher employee morale and productivity
- Increased ability to recruit and retain employees
- Owner retains control of company
- Stock sold in a tax-free sale
- Earn higher after-tax proceeds vs. sale to outside buyer
- Repay debt with tax deductible, tax-free dollars
Importantly, ESOPs can be an ideal way for an owner to exit his or her business by selling it to management and employees. Indeed, some 10 trillion dollars in assets are held by Baby Boomers today, much of it tied to their businesses. A major transfer of these assets is expected to occur in the next 15 years.
Financial Services Resources