Ira Riklis – Random Thoughts on Random Topics

An Employee Stock Ownership Plan, or ESOP, is a financial structuring of a corporation to allow employees to own a part of the company by creating a stock option program. Employees, generally after a certain length of employment, are allowed to begin purchasing stock option in the company. Employee ownership programs can be for a partial or full ownership of the company.

There have been many advantages shown in creating an ESOP for a corporation. Employees who feel they have a crucial part in the company’s future will work harder to ensure the company’s success. Corporations that set up an employee stock ownership plan will also create a board of directors and allow employees to have a vote on many important issues.

This type of plan also keeps ownership of the company within a confined number of people. Stocks will not be sold openly on the stock market and persons outside of the company cannot partake in stock options. Employees may be limited to the amount of stock they can purchase; this will be determined by each individual plan.

Most companies that establish an employee stock option plan also offer dividends to its shareholders. This extra incentive makes investing in the company even more desirable. Many corporations establish 401k options for these stocks and for dividend deposits, creating a generous retirement savings option for the employee.

Establishing this type of plan offers the corporation owner many benefits they would not have had under different circumstances. Creating an employee stock ownership plan is a fabulous way for the company to raise capital. It is also a fine incentive to recruit employees.

To establish an employee stock ownership plan the firm must contact a financial advisor that is well trained in this area of business planning. There are many contingencies that must be met to establish this type of investment plan. A trust must be established, stock prices set and rules created for the purchasing and selling of this stock. Experienced advisors at www.sesadvisors.com is a good place to start for this help.

Once a plan has been created the company can experience the growth and commitment from its employees that it desires. As employees begin o take an active part in the future of the company, the company will grow. The additional capital now available to the company through the sale of its stocks will ensure the growth will happen.

Creating this type of plan will also allow owners of the company to eventually retire without a large hassle. Owners, now major stock holders, will be able to sell off their stock and walk away from the company when they are ready to retire. There will not be a need for selling the company or even possibly shutting it down when the owner wishes to retire.

The process of creating an employee owned stock ownership program is not new. Companies, such as Sears and Roebuck, in the late 1800’s began establishing plans to give their retiring employee’s a stock option so that they could retire in comfort. It is also not as rare as you may think. Statistics show that as many as 20 percent of large corporations in the United States are now owned this way. Southwest Airlines runs a very successful employee stock option program.

The ESOP model of business structure is continuing to emerge as a preferred business practice. With an economy that is in a constant state of fluctuation business owners are looking for alternatives to financing their business and taking care of their employees. An employee stock option program offers many tax advantages to the corporation and the stock holders alike. The tax savings alone for either party makes this an attractive choice.

There are several pros and cons to an ESOP plan, but for most people and companies the pros usually far outweigh the cons.

The two most common reasons for an ESOP plan is to purchase out the stock of an owner that is retiring or to add incentive and benefits to an employee plan within a company.

Other reasons a company will incorporate an ESOP plan is to finance expanding the company, to be able to purchase a new acquisition the company needs to grow, do away with or spin off a portion of the company that is no longer needed or to privatize a more public company. Sometimes, ESOP’s have been used to bail out a failing company to prevent if from closing its doors.

There usually aren’t any long term plans implemented in a small, closely held company. Even if it is extremely successful and profitable, ESOP’s allow for the major shareholder or a retiring founder to part with their shares to employees or family members. This will provide job security and the taxable gain from the sale goes back into the company unlike if the shares were sold to a competitor, a huge conglomeration or even the liquidating of the company.

The biggest advantage to making an ESOP plan for employees is that it is part of their benefit/incentive program. For this reason employees that hold a share are more dedicated to the success of said company. It will generally improve the employees work effort and reduce turnover. It also increases overall improvement and boosts employee attitude.

The Employee Ownership Foundation conducts studies of companies that utilize ESOP plans. This foundation noted in 2009 that over 88% of companies that created employee ownership through an ESOP plan thought it was a very good decision and increased performance. It also increased profitability and revenure for the company, but on a smaller scale.

Any company that puts an ESOP plan in place benefits in many ways such as the net worth of the company increasing as well as tax-deductible dividends.

Employee advantages are sharing in the growth of a company and dividend income.

Shareholders or stockholders of an ESOP plan company also have an advantage, the biggest of which is creating a fair market value in liquidation instances.

One of the biggest cons or drawbacks to an ESOP plan is that it won’t work if a company is in debt. Another time that utilizing an ESOP plan is not advantageous for a company is if it has too many employees to feasibley purchase the amount of stock the company has in order to produce a profit.

So, it is not very hard to see that there are several pros to consider and very few cons when it comes to considering an ESOP plan if you have a closely held or private company you want to keep that way.