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ESOP 101: The What/Why/How

The following video provides an overview of the many benefits that ESOPs can provide to retiring owners and future employees.

ESOP Participants Can See Huge Benefits

WinCo Foods’ ESOP is Making Millionaires

What happens when an owner sells his company to his employees, and the profits then inure to the ESOP for the benefit of those tasked with growing those profits? Often, great things happen. Watch this video about how the WinCo Foods grocery store chain is benefiting its employees through an ESOP:

You can read the entire story about the employee owners of the WinCo Foods’ ESOP here.

ESOPs Take the Oxymoron Out of Inclusive Capitalism

ESOPs Take the Oxymoron Out of “Inclusive Capitalism”


In a January 20, 2015, op-Ed piece in the New York Times, “Can Capitalists Save Capitalism”, Thomas Edsall reports that key Democrats have reached agreement on a set of policies known as “inclusive capitalism” that would reduce wealth and income inequality.  According to Edsall the inclusive capitalism concept has expanded worldwide over the past 13 years to apply to those at the bottom and the middle of the ladder in developed nations, including the United States. Edsall reports that Republican leaders in Congress have already “stiff-armed” these proposals.


On May 27, 2014, more than 220 leaders met for the “Conference of Inclusive Capitalism” in London to discuss the future of capitalism and “how we can act to make our economic system more equitable, more sustainable and more inclusive.” Carol Hanish, writing in CounterPunch, a magazine that touts itself as “America’s Best Political Newsletter”, dismisses “inclusive capitalism” as an oxymoron and posits that in economics our thoughts and actions must be constrained within a discussion of “capitalism” versus “communism”.


Is there a way to bring these shrill views together?  Is there a vehicle to help mitigate the media-fanned tension between the evil, exploitive others and the virtuous rest of us?


There is such a vehicle in the United States, and it is already a vibrant part of federal law.  It has continuing broad-based, bi-partisan support.  It helps business owners, and it rewards employees by turning them into capitalists. It distributes capitalism into smaller employee teams who can compete effectively in the global marketplace.  It supports the fundamental American idea that reward follows hard work and strategic collaboration.


The vehicle is the Employee Stock Ownership Plan (the ”ESOP”).  It is a special kind of qualified retirement plan that can borrow money to buy businesses from owners who wish to sell. The ESOP buys the seller’s business for the benefit of all the employees of the business.  These employees in turn reap the rewards of their success (and, much less often, suffer from their failures), as did the prior owner.  In most cases, other common retirement plans, like 401(k) plans, continue to exist in the employee owned business along side the ESOP so that the risk to employees of business failure is minimized.


ESOPs have been around for many years.  Since 1974 they have been defined and regulated by the Internal Revenue Service and by the US Department of Labor for the protection of the employee owners.  They offer tax benefits to selling owners as well as tax benefits to employee owners. Because ESOPs benefit both owners and ordinary employees, both US political parties have consistently supported them.


Over 50% of the US workforce works for small businesses with fewer than 500 employees.  About 15 million of these employees already work for the approximately 9000 companies that have ESOPs or ESOP-like profit sharing plans.  Employees of ESOP companies regularly accumulate and ultimately receive substantial cash benefits from their ownership in ESOP companies.


In the United States, it is not necessary to create dozens of new, convoluted tax and fiscal policies to produce inclusive capitalism.  It is not necessary to create more bureaucratic structures to deliver fiscal benefits or to administer new taxes.  It is not necessary to increase the level of sharp partisan disagreement about policy.  All we need to do is increase the use of a well-defined tool that we have had in place for over 40 years.


ESOPs are the ideal synthesis between traditional capitalism and inclusive capitalism.  They represent capitalism.  They do not represent communism or socialism. They encourage employee owners to pool their front line knowledge competitively in the global economy.  They spread the wealth among those who compete successfully, and they have the potential to reinvigorate global American business with a tool already at hand.


Is an ESOP Right for Your Business?

We are frequently asked whether an ESOP is right for a particular business. As a business owner reaches retirement age, the question of how to protect his legacy while exiting the business comes to the fore of his or her mind. On the one hand, an owner can sell his or her business outright. But this involves the owner immediately giving away all that they have worked for and built. An ESOP may provide a better option. In an article featured in Forbes magazine, contributor Stuart Robertson suggested five questions that will assist business owners in deciding whether an employee stock ownership plan (ESOP) is right for their business.

  1. Does the company make enough money? For Robertson, an ESOP makes sense only if a company has at least 20 employees and more than $5 million in annual sales. This is because the set up costs and annual costs of running the plan can cost thousands of dollars. While the 20 employee / $5 million in sales figures are not absolute, Robinson uses these numbers as a way of highlighting the need to conduct research and/or studies before setting up an ESOP to ensure such a plan is financially feasible for the company. We suggest that net profit in the range of $1 million is a better barometer.

  2. Does the owner or owners want to retain some measure of control? In a straight sale of a business, the owner or owners sell their ownership interests outright and thus lose all ownership rights in one instant. But an ESOP can allow an owner’s interests to be purchased in stages over time. For an owner who has worked for years to build the business, this gradual transition allows the owner to ease into retirement. Indeed, in most ESOP transactions, the owners remain board members and executives for some time after the close of the transaction.

  3. Is the owner in a hurry to sell? If the business is profitable and the owner is in no hurry to sell (i.e., the owner has some money in reserves and is comfortable with the employees buying him or her out over a period of time), an ESOP may make sense. Conversely, if the owner is strapped for cash and requires immediate and full liquidity, an ESOP may not be a good choice.

  4. Is the owner concerned about his or her tax liability? An ESOP can provide significant tax benefits, including deductibility of contributions and the deferral of capital gain on a sale of C corporation stock if proceeds are reinvested in stock of U.S. operating companies.

  5. Does the owner believe in his or her employees? Companies with ESOPs generally have higher productivity levels and larger profits because employees are motivated to help the business succeed. Owners who do not trust their employees to work for the betterment of the company may not see the benefits of setting up an ESOP.

Contact a Knowledgeable ESOP Attorney

Whether you set up an ESOP for your business is a decision that can have a dramatic impact on the future of your business. Do not make this decision without consulting with us at ESOP Plus. We can help you evaluate whether an ESOP makes sense for your situation and, if it is, we can assist you in setting the plan up. Contact ESOP Plus today at (888)-840-6830.

How Do I Set Up an ESOP?

40 years ago, Employee Stock Ownership Plans (ESOP) were virtually unheard of 4. Today there are approximately 7,000 vibrant companies that have ESOPs in place, benefiting over 13 million employees. While there are many reasons why a private company may set up an ESOP, the decision process to set up an ESOP and actually setting up such a plan usually includes the same or similar steps:

Step One: Determine if the Owners and Senior Management of the Company are Agreeable

It may go without saying, but an ESOP must have the agreement and support of the business owners. The business owners must be interested in liquidity and diversification of their wealth, and importantly, interested in transitioning ownership of the company to valued employees. It is also helpful if senior management (the valued employees) supports the process.

Step Two: A Feasibility Study

If owners and management are on board, a feasibility study should be performed. The size and complexity of the business will dictate how formal of a study is necessary, but at a minimum, a ballpark estimate of value should be determined so that the owners can decide if they want to sell. Then, cash flow, payroll, and the potential repurchase obligation of the company should be examined to determine if the company can afford to fund the purchase from the current owners and meet the limitations and requirements of the Internal Revenue Code.

Step Three: Design the Plan and Structure the Transaction

Assuming that the plan is feasible and supported by the owners and management, the next step should be to design the Plan and transaction—i.e. the sale of company stock to the ESOP. A knowledgeable ESOP attorney will draft a plan that allocates the benefit to employees in a manner acceptable to management and the IRS. Further, the knowledgeable ESOP attorney will advise as to compliance with fiduciary standards in ESOP transactions. The transaction may include bank financing, seller financing, or a combination of the two. Your ESOP attorney will assist in preparing any and all documents to ensure a smooth transaction that meets the goals of the parties and the most recent regulatory guidance. .

Step Four: Trustee Engaged and Transaction Closed

To complete any transaction, the company must engage a trustee who will act solely in the interests of the beneficiaries of the ESOP. While an employee of the company may act as trustee, it is a best practice to engage an “outside” trustee. Once the ESOP has been adopted and the transaction has occurred, the business may return to an “internal” (employee) trustee. The trustee must obtain the guidance of an independent appraiser. That appraiser will determine whether the price to be paid by the ESOP is no more than fair market value and the transaction is fair to the participants from a financial point of view.

Step Five: Carrying Out the Plan

Post-transaction activities include submitting the ESOP plan to the IRS for a determination of qualification. Your ESOP attorney will assist in this process. And like other defined contribution plans (i.e. 401(k)s), annual 5500 reporting must be completed for the ESOP. If the stock sold to the ESOP is not publicly traded, that stock must be valued on an annual basis. Not to be lost in the shuffle, employees must be educated about the ESOP and encouraged to get involved.

Contact ESOP Plus

The process of creating and carrying out an ESOP does not need to be intimidating. We can help you understand ESOPs and help you evaluate whether an ESOP makes sense for your situation. We can also guide you through the setup process and ensure your plan meets with IRS approval. Contact the ESOP Plus team today at (888) 840-6830.