ESOPs Offer Advantages to Sellers, Buyers, Employees

By Denise Glinatsis Bayer
YOUNGSTOWN, Ohio –Are Employee Stock Ownership Plans the key to sustainable business in the Mahoning Valley?

As privately held business owners approach their 60s and 70s, a looming question before them is how to transition into retirement, while ensuring that their life’s work in businesses they built from the ground up continue to grow.

Many local businesses are valuable to the area in terms of the jobs they provide and their contributions to the local economy; however, some such businesses may not be able to command a sale price that will both reward the business owner for their hard work and keep all loyal employees on staff.

Enter the ESOP, a variation of the traditional profit-sharing plan.

ESOP Benefits Include Favorable Tax Treatment

ESOPs are tax-qualified employee benefit plans that give employees ownership interest in a closely-held company by allowing them to purchase stock in the company. ESOPs must meet governmental regulations issued by the U.S. Department of Labor and the Internal Revenue Service.

Stock and cash contributions to the plan are tax-deductible, which provides a cash-flow incentive to invest back into the company. Income earned by the ESOP is tax-deferred. Since the ESOP is a retirement plan, employees are not taxed on their accounts until the money is withdrawn.

ESOPs differ from traditional profit-sharing plans in that (1) the ESOP is the only qualified employee benefit plan that can borrow money; and (2) the ESOP invests primarily in employer stock.

ESOP stock is held in a trust outside the company, with a separate fiduciary obligation to act in the best interest of the participants in the ESOP. Each employee has their own individual stockholder account within the trust.

ESOPs Can Keep Sellers and Employees Engaged

As opposed to an outright sale, where owners may need to say goodbye to their business immediately, a transfer of ownership to a business’s employees allows owners to stay involved with their company as they receive payment for their interest — many times without the headache of a capital gains tax.

Additionally, an ESOP provides a great incentive for an employee to stay with an employer for their career, enabling the employee to retire with a larger nest egg than their counterparts in non-employee-owned companies.

ESOPs are an increasingly attractive legal vehicle that can ensure that local, privately held successful businesses continue that success well after the initial owners of the business leave.

The author, Denise Glinatsis Bayer, a lawyer in the Youngstown office of Harrington, Hoppe & Mitchell, focuses on business and nonprofit law, real estate law and copyright/trademark law.

Copyright 2024 The Business Journal, Youngstown, Ohio.