Practice Groups
Employee Stock Ownership Plans (ESOP)
We are known nationally for our ESOP expertise. Our ESOP practice specializes in closely held corporations that want to sell shares to employees, benefiting both the employees and owners, who receive long-term capital gain treatment in the sale of their shares.
In advising how to structure and operate an ESOP, we work closely with banks providing trustee services to the plan and to the owners of closely-held businesses and their lawyers and advisers to achieve a result that complies with all of the often highly-technical aspects of ESOPs and that makes sense from a business standpoint for all concerned. We are highly knowledgeable in the due diligence process that is the prerequisite to every successful ESOP transaction.
Please read the description below of what makes ESOPs a special type of benefit plan.
An ESOP is a type of pension plan, which is designed to invest primarily in the stock of the employer corporation. It is the only type of pension plan, which can borrow money. Congress has created numerous tax incentives for corporations to create ESOPs to promote the formation of ESOPs. These tax incentives include:
- The ability of the selling shareholder not to recognize gain on the sale of stock to the ESOP, assuming certain requirements is met.
- The ability of the corporation to deduct contributions made to the ESOP to pay both interest and principal on loans made to an ESOP.
- The ability of a corporation to deduct dividends paid on stock held by an ESOP.
- For ESOPs holding stock of an S corporation not to be subject to tax on their share of corporate earnings.
These tax incentives, and others when used in conjunction with various recapitalizations and financing structures can create a better alternative for owners of businesses, on an after-tax basis, than a sale to a third party.
ESOP Fact Sheet
Benefits of ESOPs
- Companies completely owned by an ESOP are not subject to federal and state income taxes, in most states, if the Company has an S corporation election.
- Shareholders who sell privately held stock to an ESOP can defer the income on the sale if the proceeds are reinvested in U.S. stocks and bonds, if the ESOP owns at least 30% of the Company after the sale, under Section 1042 of the tax code.
- ESOPs are the only type of pension plan that can borrow money from the sponsor Corporation, and contributions to ESOPs for repayment of the loans are typically structured to be tax deductible.
- Dividends paid on stock held by ESOPs are tax deductible under Section 404(k).