Mutual Benefits 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 gota reputation for being mainly a big-business tool. The troubledparent company of United was partially owned by an ESOP until itfiled 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 onebig 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 ofhis or her company in anticipation of a transition, but doesn'twant to sell and risk the displacement of employees and the loss ofa legacy, an ESOP is worth a look. In addition to giving workersanother incentive to do their best, ESOPs offer lucrative taxbenefits for both the company and its owners. Contributions to theplan are tax-deductible, and S corporations don't pay federaltaxes on the percentage of earnings owned by the ESOP. Also, a Ccorporation owner selling at least 30 percent can defer payingcapital gains tax on the proceeds, as long as they're investedin other U.S. companies' securities. "There are no otherways a company can use its own funds to buy out an owner on apretax basis," notes Corey Rosen, co-founder and executivedirector of the National Center for Employee Ownership in Oakland,California.

The tax benefit was a big draw for Maryland Office Interiors, a23-year-old Baltimore company that set up an ESOP in 2001. Theowners didn't want to sell outright and weren't thrilledabout the idea of bringing in VCs. "[VCs'] valuations area little more aggressive, but their expectations for growth are alot more aggressive," says company president David Noel, 44,who oversaw the setup of the ESOP plan, which began with a 30percent allocation.