ESOPs are powerful planning vehicles for Exit Strategies. Despite having today lively Mergers and Acquisitions industry, many business owners continue to enquire about ESOPs as internal customers of their Company stock. Therefore it is imperative to help business owners and their advisors understand Employee Stock Ownership Plans (ESOPs) and exactly how they can help in developing effective Exit Strategies from a business. This article is targeted on helping business owners and their advisors understand Employee Stock Ownership Plans (ESOPs) and how they can help in developing effective Exit Strategies from a business.
Even with todays radiant Mergers and Acquisitions market, many business owners continue to enquire about ESOPs as inner purchasers of their Company stock. Many ESOP focused business owners recognize that their businesses are inherently difficult to market and are interested in diversification of their personal prosperity from their illiquid businesses. Others simply want to know about the tax savings that the Internal Revenue Code allows when working with these programs.
And some business owners are interested in satisfying management and key employees. · Tax-deferral of Capital Gains: Section 1042 of the Internal Revenue Code permits the avoidance of capital benefits on the sale of stock for an ESOP. Certain rules are required to be implemented with this rollover strategy, but it is possible for some corporations to sell stock and avoid capital benefits taxation in the entire year that the sale is understood. Undercurrent Estate Tax laws, the gain may be prevented if the resources are stepped up completely.
· Non-cash Tax Deductions for the business: As a defined contribution plan, the ESOP allows a Company to make non-cash contributions for an ESOP that reduces its current degree of taxable income. · Diversification for the Business Owner While Maintaining Control: This inner transfer strategy allows a business owner to diversify any amount of their illiquid keeping in the business while still keeping control and drawing salary and other perquisites of ownership. By contrast, External exchanges almost require offering a managing always, or majority, the position in the ongoing company.
Another benefit to an ESOP is the likelihood that the employees will appreciate the worthiness of their productivity and change their behavior face to face. Employees will get small amounts of non-voting shares of stock each year to their ESOP accounts (remember that it is the sharing of the stock ownership that allows the taxes benefits in ESOPs).
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So, if the business rises in value, employees will discover this represented in their annual valuation. Often times this serves the goal of encouraging more productivity at work through a sense of ownership in the Companys fortunes. Both these drawbacks are mitigated by a few important facts. First, a sale of the business to an external buyer usually entails a much more expensive intermediary.
And second, the utilization of debt is often a very inexpensive form of financing since it allows the business owner to maintain most of the equity/ownership in the business. This means that the business owner maintains control of future income in the business. And, many business owners are pleased to learn that installing an ESOP will not preclude that owner from later selling the business for a external buyer.