Facts and myths about ESOPs

Employee share plans build on a bright future Financial strategy leads to success.

For half a century, thousands of American companies have enjoyed significant tax savings and cash advantages as sponsors of Employee Stock Ownership Plans. How many?

While federal statistics are two to three years out of date, there are currently more than 12,000. While most ESOP sponsors are private, closely owned companies with between 25 and 150 employees, there are many large, high-profile public companies, such as Peoples Supermarkets and Home Depot.

As reported earlier this year, Bernard Marcus, co-founder of Home Depot, announced that Home Depot “created over 1,000 millionaires” in 1997.

– That’s how it is. Many of those people wearing the long orange aprons are (multi)millionaires.

Many business owners choose to sell part or all of their business to employees, and in doing so, convert corporate and personal taxes into tax-free capital appreciation for them.

The ESOP horizon remains very bright and Congress continues to broaden the qualification for ESOP sponsorship.

Starting this year, Subchapter S corporations are also qualified ESOP sponsors. This represents unique opportunities for Scorp owners. As an example, many C corporation owners sell their business to their ESOP and thus avoid all capital gains taxes. Subsequently, switching to an S corporation avoids all future corporate income taxes.

Why do more than 11,000 companies sponsor an ESOP? Because the ESOP is the most fiscally advantageous mechanism for business owners to achieve very profitable goals.

First, you now have a willing buyer for part or all of your business and pay no taxes. Second, you can have the most profitable plan to motivate employees to do their best. After all, who works harder, the owners or the employees?

Suffice it to say that over the past 30 years, studies conducted by federal agencies and the private sector conclude that ESOPs are, without a doubt, significantly more profitable than their counterparts.

An ESOP is an employee benefit plan that operates through a trust that accepts tax-deductible contributions from the company to purchase company stock. As mentioned above, the individual who sells does not pay taxes. Think about how powerful this advantage is for business owners. The business is purchased with tax-deductible dollars and the seller pays no taxes.

The ESOP can purchase both new and existing shares. The ESOP trust can also borrow money.

Using an ESOP to borrow money is another great cash advantage and tax saving opportunity for business owners because when paying back the loan, both the interest and principal are fully tax deductible.

Congress continues to support tax savings and cash benefits available exclusively to ESOPs. Now S corporations, as well as C corporations, are qualified sponsors.

Every day, business owners fight two battles. Doing it and keeping it. The ESOP financial strategy helps to win the first and practically ensures success with the second.

myths and realities

The six most common misconceptions about ESOPs:

ESOP Myths:

– ESOPs are a freebie.

– Shareholders lose control.

– Must disclose financial data to employees.

– My employees cannot pay me what my company is really worth.

– ESOPs are for bankrupt companies.

– ESOPs are forever.

ESOP facts:

– ESOPs buy shares of the company.

– Executives maintain full control.

– You are not required to disclose financial data, executive compensation or company value.

– Total market value of the country ESOP.

– Ninety-eight percent of ESOPs are in healthy companies.

– ESOPs can be reversed.

– ESOPs can be reversed.

The Business JournalNovember 27, 2002

Frank Amato is a Managing Member of the Arizona ESOP Group, LLC http://www.arizonaesopgroup.com. You can reach him at (480) 222-0199 or (480) 227-3064.