Employee Stock Ownership Plan (ESOP): Is it good for your business?

To find out whether or not ESOP is good for you, you have to first understand what it’s really all about. An Employee Stock Ownership Plan also called an ESOP is a program for soon to retire individuals that allows them to acquire an ownership interest in the organization of their employer. You will more likely encounter ESOP on business owners trying to transform their business as a benefit to employees. It happens when business owners depart or want to move ownership away from a specific group f owners. An ESOP offers tax benefits that business owners usually ran after. It’s considered as qualified because the ESOP’s sponsoring company and the shareholders and participants who sell receive several tax benefits. It is best used as a corporate finance strategy and a tool to align the employees of the company's interest with the company’s shareholders.

Companies with majority holdings owned by their own employees are called Employee-owned corporations. This is the reason why these companies are similar to cooperatives except that the capital of the company is not distributed equally. Most of these companies only provide voting rights to particular shareholders. If you’re a senior employee, you can benefit from getting more shares compared to newly hired employees.

To help you decide whether ESOP is good for your business or not, continue reading to find the simple break down of the employee stock ownership plan.


Why should you get an ESOP?

Employee Incentives. ESOP allows employees to participate in company ownership without having to pay while also creating a market for privately owned company stock. 

• Defer Capital-Gain Taxes for business owners. Another major benefit a business owner enjoys for having an ESOP is being able to avoid or defer capital-gain taxes. The large tax incentives create a moderation on large capital gains tax problems. Many founders and entrepreneurs find ESOP’s unique and is a great opportunity in allowing organizations to borrow money. The borrowed cash is used to purchase company shares or shares from existing owners. The company makes tax-deductible contributions to the ESOP to pay back the loan. The principal and interest are therefore deductible.

• Company Culture Enhancement. There are several industrial companies that implemented ESOP program because of the opportunities it offers with regards to the enhancement of the company’s culture.  It ensures the culture and the people’s survival once a transition in ownership happens.

• Employees are more encouraged to give their best. ESOP’s help employee-owned companies increase its level of employee engagement resulting in higher sales rate, employment growth, productivity, and lower turnover. It makes sense because employees benefit from the strength of the shares they own and giving their best at work making things happen.

 Other Versions of Employee Ownership

Companies naturally want their management to maintain and keep specific corporate culture and prevention of hostility, stock ownership plans that provide packages offers additional benefits to employees helps the company reach its goal. There are other versions of employee ownership as well such as the following:

• Direct Purchase Programs. The shares in this program are purchased by the company employees using their personal after-tax money. There are countries that provide special tax-qualified plans allowing employees to purchase stocks of companies at a discounted price.
• Stock Options. The shares bought in this program are at a fixed priced for a set period of time exclusively for company employees.
• Restricted Stock. Employees can receive shares as a gift or as a purchased item as long as particular restrictions are met. Working for a specific period of time or hitting performance targets are some of those restrictions.
• Phantom Stock. Employees performing great at work can expect cash bonuses from Phantom Stock. The bonuses they receive is equivalent to the cash bonuses of a particular number of shares.
• Stock Appreciation Rights. Employees are allowed to raise the value of the designated number of shares that are usually paid in cash. 

If you’re a business owner looking into offering ESOPs for your employees but is still confuse with its regulations and policies, you can consult an Accountant to further explain what and where you should start. A tax professional on the other hand will help you understand the tax incentives you can gain from having one.