Employee Stock Ownership Plan (ESOP)

The most common form of employee ownership in the United States is the ESOP – Employee Stock Ownership Plan. There are over 6,500 active ESOPs today nationally, representing over 14 million employee-owners. ESOPs are retirement plans, somewhat like 401(k)s, except the invested dollars all go into the company where the employees work. And importantly, like a 401(k), an ESOP is tax-advantaged. Whatever portion of the company is owned by the ESOP pays no federal or state corporate income tax. That’s right – if a company is 100% owned by its employees through an ESOP, the government does not tax its profits at all! 

Because of this tax credit, when a business forms an ESOP, it sets off a virtuous cycle. The selling owner or owners make a competitive profit on the sale. The bank loan can provide them with liquidity if needed, and the interest + principal on that loan can be paid off safely due to the tax advantages of the ESOP. The tax advantages can also help pay for the other service providers (lawyers, valuators, fiduciaries, etc.) needed to perform the transaction and ensure the ESOP meets all of its legal requirements in the years to come. 

If your company has 20 or more employees, low debt, and is consistently profitable, an ESOP may be a great option for you. Otherwise, a Worker-owned cooperative or employee ownership trust may be better.