As its name implies, Diamond ESOP Advisors PLLC, is dedicated – not to just encourage employee stock ownership plan (ESOP) implementation, but to further ESOP understanding so that intelligent, informed decisions can be made as to whether ESOP constitutes a logical and advantageous fit, and, if so, why.
ESOPs were included in the law to induce private industry to create a means whereby employees would share in business profitability they help to produce. The desired end is to improve both business performance and the economic status of the U. S. private industry workforce, and to encourage the employees it encompasses to strive to further their employer’s success, and, with it, enhance their own financial stability. Congress recognized that without meaningful financial inducements, few business owners would choose to implement this novel idea. Accordingly, it embodied these inducements into our tax system and made it so that the cost of implementing an ESOP program is largely covered by means of tax savings. These dramatic savings take many forms.
- Business owners who sell stock in their companies to an ESOP can reinvest the proceeds into ownership in other active businesses and thereby indefinitely defer, and even eliminate, income tax that would otherwise diminish their gain on such sales.
- Businesses that sponsor an ESOP can deduct the money that they contribute to that ESOP to enable it to pay for that stock. Note that the combination of stockholder and corporate tax saving can be astonishing.
- ESOP companies can deduct reasonable dividends they pay to their ESOP – the only instance in our tax system where this is possible.
- Depending upon how the ESOP transaction is structured, owner-employees and their family can share, pro-rata, in the allocation of that stock among employee accounts within the ESOP.
- When the ESOP company is wholly-owned by its ESOP and has elected to be taxed as a “flow through entity” pursuant to Subchapter S of the Internal Revenue Code (the Code), its income flows through to to its stockholder, i.e. the ESOP, which is not taxed. This, in effect, makes that company tax-free. It can then use those tax savings to: (a) pay off stock acquisition debt, (b) finance future growth, and (c) pay money to departing ESOP participants as and when it becomes due. (Note – while the thought of selling all of a company’s stock to its ESOP might initially appear to be repugnant, in actuality it has the potential to be quite advantageous to all concerned.)
Employees will benefit from the ESOP’s growth and should be incentivized to do their utmost to maximize company profits and, with that, their personal wealth. Studies show that this is the case and that, accordingly, ESOP companies out perform their non-ESOP competitors.
These particular ESOP advantages are supplemented by many more that, in concert, can make ESOP adoption the best planning choice available, especially in a business succession and estate planning context.
With all of these tax inducements you might expect that ESOPs would be “coming out of the woodwork,” but they’re not. Why? Not enough planners know and understand them. Don’t let this happen to you. We suggest that you seek an indoctrination to them and implement a thorough “feasibility study” to determine if ESOP has a place in your future.
Incorporated into this website are articles and other material that can enable you to delve as deeply as you desire into the ESOP concept. Feel free to pose your ESOP questions to me by email or phone and allow me to answer your questions and convey my thoughts on how ESOP might, or might not, fit your particular situation.