GREAT 46 IDEA: Establish an Employee Stock Ownership Plan (ESOP)

When a small business owner wants to cash out or pull some equity out of his or her business for retirement, one of the best options for employers and employees is to set up an employee stock ownership plan, or ESOP.

ESOPs allow business owners to sell company shares to employees at a fair price. ESOPs also provide significant tax benefits for owners while providing retirement benefits for workers. Workers who own shares usually feel more loyal and driven to perform, so productivity increases and, as a result, their stock increases in value.

“Ninety-one percent of ESOP companies declared that creating employee ownership through an ESOP was a good decision that has helped the company,” said J. Michael Keeling, president of the ESOP Association. “That's saying a great deal in these challenging times.”

An ESOP can also help finance the expansion of the business, so everyone benefits. ESOPs work especially well for small, stable companies with fewer than 100 loyal, long-time employees. The employees get all the economic benefits of being a shareholder without the liabilities.

America has about 11,500 ESOPs, covering 10 million employees, according to the ESOP Association, based in Washington, DC (http://www.esopassociation.org). Total assets of U.S. ESOPs at the end of 2007 was estimated to be $901 billion. About 20 percent of ESOP companies are in the manufacturing sector. Most ESOP companies also have retirement and savings plans in addition to employee stock ownership.

One huge perk for business owners is the ability to deduct both the principal and interest on any loan used to finance an ESOP. If you borrow money to create the ESOP, you can use the entire distribution tax free.

If you are thinking of creating an ESOP, you'll need an experienced team comprised of an attorney, an accountant, and a bank or brokerage house to provide the cash to buy the shares.

You'll also need a skilled administrator to keep track of the paperwork and distribute shares when employees quit or retire. Most employees are vested in the plan after five to seven years.

Contact the ESOP Association at 1726 M St., NW, Washington, DC 20036; (202) 293-2971; via (e-mail: [email protected]; or at their web site: http://www.esopassociation.org.