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Understanding ESOPs (part 5)
U ndergoing an ownership or management transition is no easy task. It is important to understand one’s goals and objectives prior to selecting a path to succession. An employee stock ownership plan is one of only a handful of succession alternatives. This article serves as the final part of our Understanding ESOPs series. ESOPs are becoming an increasingly common tool for succession planning among AEC firms.
Additionally, the benefit of participating in an ESOP could be used as a significant employee recruitment and retention tool. It can also help in the “she has ownership and I have no ownership” issue that exists in many AEC companies. If not addressed, this can become a significant distraction to those with no ownership. Finally, an ESOP transaction does not require a financial contribution from the employees, thus eliminating “When comparing an ESOP to other transition alternatives, an ESOP remains as one of the most flexible business transition alternatives.”
Pat Stoltz
Utilizing an ESOP as a part of the succession plan is a common tool in the AEC space, as it aligns well with the culture and objectives of many well performing companies in this space. Because it is not uncommon for AEC firms to have broad-based ownership within the management team, the employee ownership mindset is already embedded into this sector. Given that a 100 percent ESOP company (S corporation) is exempt from federal and most state income taxes, utilizing an ESOP allows the company to spread the economic benefits of ownership to the employee base in a tax efficient manner. If the ESOP transaction is structured for a C corporation, the selling shareholder(s) may have the ability to defer capital gains tax, significantly enhancing the after-tax cash proceeds from the stock sale.
Jim Swabowski
See PAT STOLTZ & JIM SWABOWSKI, page 12
THE ZWEIG LETTER February 24, 2020, ISSUE 1333
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