Employee stock ownership plans, or ESOPs, are the most common way that employees own businesses in the nation. Businesses establish trust funds into which they contribute money to purchase existing shares of their companies or shares themselves. In some cases, the ESOP will borrow money to purchase shares, and the business will contribute the cash needed to repay the loan. Employees who are over the age of 21 and who work full time at the business have a certain percentage of shares allocated to them. Employees become fully vested in three to six years, and when they leave, the company must repurchase their shares at the fair market value.
Preparing Your Team to Buy the Company
In order to implement an ESOP plan, a company will need to take time and change the way in which it does business. With ESOPs, employees have a lot more say in the business's practices. Companies can start by making their workplaces more collaborative, encouraging employees to give input, engaging frequent communication, and educating employees about a range of financial concepts. Lines between management and employees begin to shift and change during the transformation to an employee-owned company, making it essential to keep a continuous dialog going that ensures everyone is involved and clear on what's going on, and that they feel as though they are a part of the team.
Benefits of an ESOP Plan
ESOPs provide benefits both in terms of taxes and in employee motivation and productivity. The tax benefits offered by ESOPs help the companies themselves as well as the employees. When companies contribute new shares to the ESOP, they are able to take tax deductions for their contributions. Employees do not have to pay taxes on the amounts they contribute to the ESOPs, and they are only taxed on the distributions, for which they may be eligible for more favorable tax treatments. ESOPs also help to motivate employees as valued members of their organizations, increasing their longevity, decreasing turnover, and improving their commitment to the business's customers and to their work.
Some businesses are concerned that the costs for establishing an ESOP will be too prohibitive. While the upfront costs to implement an ESOP plan can be high, the potential long-term benefits can far outweigh them, providing excellent benefits to the business and its employees.