ESOPs

Introduction

Employee stocks ownership plans (ESOPs) are a very tax-efficient means of sharing ownership of a company with its employees. Applicable federal legislation that encourages ESOPs allows wide latitude to company owners, employees, and service providers to design and implement the plans to fulfill a wide range of interests. The tax incentives and design flexibility do have a cost: regulatory compliance with an exacting set of rules.

The focus of this book is to discuss the applications of ESOPs in closely held companies. The closely held company, by definition, does not have stock that is publicly traded on a recognized stock exchange. The stock is typically held by a limited number of shareholders. The purpose of the ESOP is to own stock for the benefit of the ESOP participants and their beneficiaries. This book examines the various ways an ESOP may acquire stock in a closely held company and many of the best planning practices to accomplish that goal.

The material on ESOPs is particularly timely for the following reasons:

• Approximately 78 million baby boomers are coming into retirement age during the next 10—15 years. These baby boomers often have considerable net worth captured in closely held companies, and they will have to transition that wealth to the next generation of owners. There may be more sellers than buyers as a result. The ESOP is an inside buyer that wants to have an equity stake in the company, subject to compliance with applicable regulations.

• The ...