Existing Stockholders—As detailed above, benefits attainable by business owners through ESOP cannot be matched anywhere else within our tax system—a company’s income can be made to be tax-exempt; stock can be sold without a tax on realized gain; different forms of “Synthetic Equity” can be designed to enable a stock sale to be coupled with a continuing equity interest in company growth; and so much more. You will see that where the business involved is profitable and worth considerable money, an ESOP can be quite lucrative. Moreover, ESOPs are flexible and can be tailored to meet varying goals—including the advantageous treatment of heirs whether or not they maintain a continuing active interest in the business.
Employees—ESOPs couple well with other types of employee retirement vehicles such as 401(k) and profit-sharing plans. They serve the purpose of supplementing retirement benefits and correlating employee wealth with the success of their employer. That’s where “employee ownership” comes into play and incentivizes employees to enhance their performance for the good of all concerned.
The Company—Companies prosper when their employees are enthused and incentivized, and tax benefits (e.g., being tax-exempt) inure to them as well as to their stockholders.
Lenders—Incurring stock-acquisition debt is a major factor in most ESOP transactions. Banks and other prime lenders recognize that ESOP companies are usually good credit risks. Remember that ESOPs are really only logical for profitable companies that have a high net worth and Congress has helped by enacting into law provisions specifically designed to encourage banks to make ESOP loans.
Our Government—I started out by saying that Congress is enthused about ESOPs. Starting with Senator Russell Long, for many years the chair of the Senate Finance Committee, who led the effort, Congress infused into ERISA incentives intended to encourage U.S. corporations to adopt ESOPs. Periodically, Congress holds hearings to further consider the desirability of continuing this line of thought. Expert testimony has been elicited and evidence in the form of in-depth studies comparing results achieved by ESOP companies with their non-ESOP contemporaries discloses that the former are more productive and profitable than the latter. Universities and organizations such as The ESOP Association, The National Center for Employee Ownership, and the Employee Benefits Research Institute have engaged in this kind of research and analysis and compiled convincing evidence in support of this conclusion. Carried to its logical end, making U.S. private industry more productive makes the USA more competitive internationally—which, in turn, fosters a continuing affinity between Congress and ESOPs.
The Bottom Line
An ESOP is not always the right answer. It may be that it doesn’t fit the goals at hand. But unless this planning alternative has been at least considered, it is hard to justify that an adequate study has been done.