Are Employee Stock Ownership Plans (ESOP) best for your company?

Employee stock ownership plans (ESOPs) are qualified defined-contribution employee benefit plans designed to primarily invest in the stock of the sponsoring employer. In the case of an ESOP, the term “qualified” refers to the fact that the sponsoring company, the selling shareholder, and participants all receive various tax benefits.

An ESOP is a type of retirement plan in which a company contributes its stock or money to buy its stock to the plan in order to benefit company employees. The plan maintains an account for each employee participant. Shares of the company stock vest over time before an employee is entitled to them. An ESOP is different than an employee stock option plan which allows employees to buy company stock at a set price within a certain period.

ESOP’s can be used as an incentive to keep participants focused on your company’s performance and share price appreciation with essentially no out of pocket costs to the employees themselves. But, you need to consider whether or not an ESOP is a good fit for your company.

Having well-qualified business advisers involved in the decision-making process is critical. GYL, a San Diego CPA for businesses, provides financial consulting services to businesses to help increase profitability.

Considering all your options

GYL is a full-service accounting and business consulting firm. Our goal is to meet all of your company’s financial needs by analyzing key business issues that you’re having and coming up with financial plans to ensure both short- and long-term success. Transitioning to an ESOP model may be part of your company’s financial plan.

Our consulting services include regular meetings with our clients at which time we can discuss ESOP options as well as the strategic, financial, and compliance issues that are associated with ESOP design as well as execution, financing, and maintenance strategies.

If you’re considering creating an ESOP, our team of experts at GYL will work with you in planning and executing the transition to ESOP ownership.

The long-term effects on your business

According to Loren Rogers, executive director for the National Center of Employee Ownership, there is a “synergistic effect between employee-ownership and engagement”. Data has shown that companies with ESOP’s have higher rates of sales growth, employment growth and productivity, and a lower employee turnover.

Additionally, ESOP’s provide a number of significant tax benefits to both you and your employees.

However, before deciding as to whether transitioning your company to an ESOP model will be beneficial, it’s important to consider the following factors;

Company culture
Debt capacity
Valuation of your company
Number of employees
History of company profitability
The level of commitment on the part of management and other personnel

At GYL, our professionals can help you with ESOP planning as well as estate, retirement, and business succession planning. Our firm also performs audits for ESOP’s and other employee benefit plans.