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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.

By C.J. Prince

Opinions expressed by Entrepreneur contributors are their own.

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.

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