Employee stock ownership plans (ESOPs) and employee stock purchase plans (ESPPs) are both employee benefit plans that companies use to extend ownership benefits to employees. ESOPs and ESPPs both offer employers ways to help employees grow their retirement savings and build wealth.

In addition, both of these employee benefit plans can be powerful tools to promote employee engagement and a sense of shared culture and aligned values. Employees with an ownership stake in the business may be more attentive to the shared company vision and culture. That, in turn, can have positive effects on recruiting and retention, productivity, and long-term company success.

Despite their similar names, these two types of employee ownership benefits are quite different from one another. An ESOP is a qualified defined contribution retirement plan, so employees don’t purchase shares with their own money. An ESPP, on the other hand, is a plan that allows employees to use their own money to buy company shares at a discount.

What is the "American Dream" and does it still exist? 

For some, this may seem like a dated term from the 1930s that promises unrealistic expectations in a modern (and expensive) world. Parents and grandparents share stories of when they were young and aspired to own a home, a car, have children and live the “dream.”

This phrase has become our ethos, a guiding belief system that many of us embrace in the United States. Regardless of our name, income level, background, where we live or where we work, we all have the same level of freedom and opportunity to achieve success and prosperity. Oprah Winfrey, Larry Ellison (Oracle Co-Founder) and Elvis Presley are three names that are widely associated with this concept. 

When company leadership considers whether an ESOP is a good fit, they must carefully consider the pros and cons of the decision, including how transitioning to an ESOP may impact a company’s tax obligations — and how ESOP taxation rules may provide a competitive advantage to the company.

The portion of a company owned by an S corporation ESOP is not subject to federal or state income taxation.

Establishing an Employee Stock Ownership Plan (ESOP) is a powerful finance and employee benefit tool. While an ESOP may not be the right fit for every business owner’s situation, understanding the benefits may open the door to a valuable business transition and growth tool you need to consider.