The Tax and Retirement Advantages of Employee Stock Ownership Plans for Small Business Owners

If you’re a small business owner, you may want to consider implementing an employee stock ownership plan (a.k.a. ESOP). An ESOP can provide an incentive for employees while reducing your corporate tax burden, according to thinkadvisor.com. Another distinct advantage is the potential bridge ESOPs create for you to retire comfortably. How? Well, you can gradually sell your business to your employees while, in the process, defer recognition of any gain you make on the sale many years down the road. This is what’s known as a Section 1042 transaction and can allow you to defer taxable gain on the sale of your business indefinitely.

But before we get into those benefits, let’s review some basics about ESOPs. They were pretty much unknown until 1974. At that point, they started to grow and about 11,000 companies now have these plans, covering over 13 million employees. An ESOP is basically a trust created by you, the small business owner. It could also be described as an employee benefit plan, or even a profit-sharing plan. In the ESOP, you contribute new shares into the trust of the company stock or cash to buy existing shares, according to nceo.org.

Employees are incentivized since they now have the opportunity to buy stock directly, be given stock as a bonus, or can receive stock options. This may encourage talented workers to stay with your business longer since they have an actual investment with the business.

When you, the business owner, decide that you want to leave the business and enter the golden years of retirement, you can sell the business interest to the ESOP, which can finance the purchase through a traditional financial institution, or even a loan. As mentioned above, you get potential indefinite deferral on the gain from the sale and you are ensuring your company is left to people who are invested in the vision that you created.

To learn more about ESOPs, speak to an experienced business planning law firm in your area.