An employee stock ownership plan (ESOP) is an optimal employee ownership vehicle for a company to provide employees with an ownership stake in the company.
- ESOPs reward employees by providing them with an ownership stake in the company they work for and help build.
- ESOP employee ownership provides an additional employee benefit to help attract and retain employees.
- ESOPs allow the transfer of ownership to employees at no cost and provide employee ownership without the need for employees to have or raise capital.
- ESOPs allow the transfer of ownership to happen on a tax-deferred basis.
- ESOPs provide the upside benefits of ownership without the downside risks. The legal shareholder of the stock is the ESOP trust. The ESOP trustee is the legal shareholder and representative of the ESOP trust:
- Participation is free and 100% funded by the company.
- Employees share in 100% of the value of the company.
- As a legal shareholder, the ESOP trustee takes on all of the tax obligations (as a retirement plan the ESOP is tax exempt), which means no K-1s or estimated tax payments for the employees.
- As a legal shareholder, the ESOP trustee takes on all legal risk.
- As a legal shareholder, the ESOP trustee takes legal responsibility for the company’s liabilities and all obligation to creditors.
- The ESOP does not affect the operations of the company. Company management continues to run the daily operations of the company.
- Providing ESOP employee ownership has been shown to improve company performance, provide employment stability, and increase job satisfaction.
- ESOP employee ownership aligns the financial objectives of the company and the employees.
- Building an ownership culture by combining meaningful employee ownership and participative management creates a competitive advantage for a company and can increase engagement.
- Employee-owned companies are 235% better at job retention. (Source: NCEO, 2018)
Check out this animated video to learn more about ESOPs.