Generations Law Group September 2019

The Business Brief

September 2019

Preparing for Your Business’s Future

How ESOPs Can Decrease Your Worries

Employee Stock Ownership Plans (ESOPs) are a great way to secure the future of your company while also enabling you to boost the daily success of your business. These plans can be beneficial for many companies, but it is important to understand how they work and how they can be implemented in your company. ESOPs are structured to provide retirement benefits for employees. The company contributes its stock to the ESOP Trust (ESOT) for every employee's retirement account. This gives employees their stake in the company’s success while providing fair compensation to the owner(s). The first step to set up an ESOP is to set up a trust. ESOPs follow a lot of the same rules as a 401(k) plan but are funded entirely by the company. The company then contributes money to the trust. However, if the company “With an ESOP, you can place your business in the hands of individuals with a very vested interest in maintaining the company’s culture and mission.”

borrows the money from the bank to buy stock or provide financing for the company, it would be a Leverage ESOP. The trust begins allocating shares to employees’ retirement accounts as it pays back the loan from the bank. By federal law, shares must be distributed according to the pay of each employee or by a formula that results in an equal distribution. Every year, the company has to be appraised to determine the value of the stock. The ESOP cashes out employees with a significant retirement benefit when they decide to leave the company. With an ESOP, you can place your business in the hands of individuals with a very vested interest in maintaining the company’s culture and mission. If you want to stay involved, you can exit at your own pace. Leverage ESOPs provide significant advantages when planning for the future of your family and your company. There are several excellent examples of employee-owned companies based on ESOPs in our area, including Norco, Winco, Idaho Power, Bank of the Cascades, Davey Tree, and Franklin Building Supply. In addition to employee benefits, the tax benefits of ESOPs make them very attractive. For sellers who want to retire and have decided to sell their company,

an ESOP may be a better alternative than a sale to someone else. Owners get a fair price, and the company can use pretax profits to buy them out. If your company is a C corporation and you sell at least 30% of your shares to an ESOP, you may not have to pay any capital gains taxes. However, the tax code requires that you invest the proceeds in the securities of U.S. companies. If you then pass these investments on to your heirs, the tax liability disappears. An ESOP can also work for an S corporation and avoid income taxes on the corporation’s profits. If you have any questions about ESOPs or Leverage ESOPs or want to learn more about these plans, give us a call today at 208-401-9300 or visit our website anytime at GenLawGroup.com.

–Tom Walker

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