ESOPs

Chapter 3

Employee Stock Ownership Plan Transaction Mechanics

This chapter will introduce the most common features of employee stock ownership plan (ESOP) installations relevant to this book. An understanding of these mechanics is helpful in gaining a fuller appreciation of the issues relating to ESOP valuations.

Note: Beginning for fiscal years commencing on or after January 1, 1998, S corporations may have an ESOP. This significantly increases the options for companies that are considering an ESOP. When appropriate, distinctions between S and C corporations are noted. Unless there is a specific reference, it is generally the case that the comments apply to both corporate elections.

Traditional Uses of an ESOP

There are a number of time-honored applications of ESOPs for closely held companies. Due to the significant tax incentives associated with ESOPs, many of the most common applications involve optimizing the tax incentives that exist. Several traditional uses of an ESOP are subsequently listed.

Provide Liquidity and Diversification for Shareholders

Typically, older shareholders wishing to retire may sell all or a portion of their stock to the ESOP. Selling stock to the ESOP is often a preferred option, rather than selling to a third party that may not continue operating the company in the historical manner or same geographical area.

The ESOP may also be used to provide liquidity for other shareholders, typically minority owners. These minority shareholders are often inactive ...