An employee stock ownership plan lets you take some cash out of your company while giving your workers a stake in the business.
Thanks to the media hype surrounding United Airlines' blockbuster bankruptcy in 2002, employee stock ownership plans got a reputation for being mainly a big-business tool. The troubled parent company of United was partially owned by an ESOP until it filed Chapter 11. But ESOPs are far more common at companies with $20 million to $50 million in revenue, says J. Michael Keeling, president of The ESOP Association in Washington, DC. "When one big company like United Airlines gets involved with an ESOP," he says, "the impression is [that only big companies are] doing them. But that's not correct."
For the entrepreneur who wants to start getting liquidity out of his or her company in anticipation of a transition, but doesn't want to sell and risk the displacement of employees and the loss of a legacy, an ESOP is worth a look. In addition to giving workers another incentive to do their best, ESOPs offer lucrative tax benefits for both the company and its owners. Contributions to the plan are tax-deductible, and S corporations don't pay federal taxes on the percentage of earnings owned by the ESOP. Also, a C corporation owner selling at least 30 percent can defer paying capital gains tax on the proceeds, as long as they're invested in other U.S. companies' securities. "There are no other ways a company can use its own funds to buy out an owner on a pretax basis," notes Corey Rosen, co-founder and executive director of the National Center for Employee Ownership in Oakland, California.