If you are one of the lucky small-business owners whose company has grown over the years, you may be looking for a tax-sensible way to glean equity from your efforts and diversify your holdings. You may also want a tax-favored way to pass along the company to heirs or others involved in your business.
An Employee Stock Ownership Plan, or ESOP, may be the answer. An ESOP is a tax-qualified, defined-contribution employee benefit plan that invests primarily in the stock of a company on behalf of its employees, who thereby gain an ownership interest in the firm.
Unlike most pension or profit-sharing plans, which must invest and diversify funds, the primary investment of the ESOP is the stock of the company sponsoring it. Today, there are about 10,000 ESOPs and similar plans nationwide covering some 11 million employees, says Scott Rodrick of the National Center for Employee Ownership (NCEO). Based in Oakland, California, this nonprofit membership and research organization serves as a central source of information on employee ownership.
A recent change in the tax laws relating to ESOPs may help boost that number. In the past, only C corporations were allowed to establish ESOPs. But with the passage of the Small Business Job Protection Act, the federal government has decided to allow S corporations to establish ESOPs starting January 1, 1998.