Kegler Brown " ESOPs

Overview

Making intelligent choices regarding business operation and transition has never been more important than it is right now. With an economy in flux and a national corporate marketplace facing rising financial uncertainty, finding innovative solutions to grow your business is a necessity. Through the formation of an ESOP, your organization can put itself in a better position to achieve its most important goals, including succession planning, employee incentives, mergers, acquisitions, tax benefits and more. The ESOP attorneys at Kegler Brown are nationally-recognized advisors, published authors and experienced presenters who will work with you every step of the way in your consideration of an ESOP.

Introduction to Employee Stock Ownership Plans

An employee stock ownership plan (“ESOP”) is a special type of qualified defined contribution pension plan under Section 401(a) of the Internal Revenue Code (the “Code”) that also meets the requirements of Code Sections 409 and 4975(e). ESOP provisions were first introduced by amendments to the Code in 1974 and were included in the Employee Retirement Income Security Act of 1974 (“ERISA”).

The primary application of ESOPs has been among closely-held corporations. Shareholders selling to ESOPs may be eligible for deferral or exemption from capital gains taxes while the corporation can fund the ESOP purchase with pre-tax contributions and pay principal on stock acquisition loans on a pre-tax basis. With an S corporation ESOP, both the corporation and the ESOP (as the shareholder) are tax-exempt and do not pay income taxes.

To understand the intricacies of ESOP formation and the specific benefits that it can have for your business, it is important to consult one of our experienced counselors.

The ESOP Business Model

The comprehensive advantages of forming an ESOP are too many to list. There are, however, three far-reaching benefits that result from the ESOP Business Model that should be highlighted. An ESOP:

Yields superior cash flow through substantial and on-going tax advantages;
Facilitates best practices in financial controls and corporate governance; and
Does not impair managerial control, even in a company owned 100% by its ESOP.

For more information on "The ESOP Business Model," please view our detailed presentation.

Major Tax Benefits of ESOPs

Exemption from corporate income taxes and from income taxes passed through to shareholders of an S corporation ESOP to the extent of ESOP ownership.
Deferral or exemption from capital gains taxes for stock sold to a C corporation ESOP.
Deduction for both principal and interest for a qualified ESOP loan used for the purchase of stock by the ESOP.
Acquisition of another company by an ESOP company using pre-tax dollars.

Major Employee Benefits of ESOPs

Gives employees an equity interest in the company and provides performance incentives.
Facilitates positive employee participation in the company.
Reduces employee turnover and increases retention.