What's an ESOP?

It's a Defined Contribution Plan that Invests in Employer Securities

Employee stock ownership plans enable closely-held companies to sell equity, at a fair market value, to an employee trust. This is not a stock option program. Instead, an ESOP is an ERISA-authorized benefits plan.

Read ahead for details on how an ESOP works, key benefits, and employee ownership pros and cons.

And for a quick study on the basics of leveraged ESOPs, download our concise guide.

Two Common Types of Employee Stock Ownership Plans

 
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Contributory ESOP

A closely-held company establishes an employee stock ownership plan and periodically gives equity to an employee trust. In a contributory ESOP, the plan sponsor receives tax deductions equivalent to the fair market value of shares at the time of contribution.

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Leveraged ESOP

Equity is sold by the plan sponsor to an employee trust in a financed transaction. Selling shareholders are paid fair market value and can defer/potentially eliminate taxes on those gains. The company receives income tax deductions equivalent to the leveraged ESOP sale amount.

How a Leveraged ESOP Works

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Who Benefits from Employee Ownership?

 
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BUSINESS OWNERS

Selling shareholders gain liquidity & asset diversification

Can defer capital gains taxes on proceeds

Maintain upside potential & a role in the company

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COMPANIES

Plan sponsors receive tax deductions on sale amount

Can become income tax-free entities

Get a tool to retain & attract talent

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EMPLOYEES

Employees secure a unique retirement benefit (company stock)

Earn real stake in their company

Gain workplace stability & peace of mind


ESOP Pros & Cons

Employee stock ownership plans carry significant benefits, but its important to understand the full range of attributes. If you're considering a transaction, it's also wise to compare ESOPs against other M&A options.

LEARN THE PROS & CONS
COMPARE M&A OPTIONS

Employee Ownership Questions? We can Help.

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When CSG Partners was founded in 2000, we made education a priority. That remains central to everything we do. So, if you have questions about selling to an employee stock ownership plan, or how to prepare for a transaction, or operating as an employee owned company, you've come to the right place. You'll find answers below and even more on our ESOP Resources page.

What are the key ESOP benefits (Q&A Webinar)
 
How are ESOP tax benefits tied to corporate structure? (Q&A Webinar)
 
How are ESOP valuations determined? (Q&A Webinar)
What is the role of an ESOP trustee? (Q&A Webinar)
 
Do employee owners have access to their company’s financials?
 
Who makes decisions in a 100% employee owned company (Q&A Webinar)