Benefits of Employee Stock Ownership Plans (ESOPs)

Benefits of Employee Stock Ownership Plans (ESOPs)

Over the years, Employee Stock Ownership Plans (ESOPs) have become pretty popular, while the traditional exit strategy has faded away. Many companies' owners pass ownership of their firm to a child or family member.

Events of the past years have revealed that the young generation is not interested or capable of leading a family business. As a result, business owners have looked for a viable exit strategy, leading to the birth of ESOPs. 

There are multiple benefits of ESOPs for both the owners and employees. Here are reasons why it is worth considering:

  1. Better Productivity

Many companies have ESOPs that prioritize company loyalty even though with low participation in 401(k). Since workers already own a share of the company with an ESOP, all employees will benefit if they succeed, giving them a sense of ownership. 

This can trigger increased productivity, leading to better performance for firms that have employee stock plans. It is normal and expected for a worker's commitment and dedication to improve when they have a financial stake in such a firm.

  1. Business Owners get a Good Exit Strategy.

The tradition of passing down a business to family members is gradually fading. With the recent global pandemic, mergers and acquisitions slowed down, limiting the options presented to business owners who wanted to retire. 

With an ESOP, however, a business owner need not transfer their property to a third party. They are confident that their employee will manage the business well without leaking sensitive information to prospective buyers. 

Also, employers who prefer to remain with a particular business can contribute shares to such a business over time rather than buying it all at once. 

  1. Tax Advantages

With ESOP structures, a business can enjoy a series of tax advantages. For C-corps, for instance, all contributions made to ESOPs can be deducted, while for S corps, there will not be taxes on contributions owned by ESOPs. In other words, no taxes on the contributions employees get

However, like standard retirement accounts, there will be taxes on ESOPs when employees withdraw money after retirement. In addition, they can deduct stock contributions which can be channelled to the repayment of ESOP loans. 

  1. Means to Attract Top Talent and Avoid Employees Quitting

Typically, staying less than two years in a firm means tossing one’s share in the wind. Staying up to 4 years might make one qualify for 40% of the shares after quitting. 

The period required by an employee to stay with a firm, also known as the vesting process, for them to be entitled to their share is enough motivation to keep such employees at the company to maximize and get the highest payout whenever they eventually leave. 

The opportunity to share in a firm is an attractive incentive for talents in need of better job offers since the retirement plan is secure. 

  1. Business Governance Does Not Change

When a business owner takes a step back from their business after setting up an ESOP, they need not be stressed over business disruption that a change of government will cause. As a result, there will not be disruption in business operations since they get to maintain a relationship with long term suppliers, clients and distributors. 

Enjoying business ownership consistency without dealing with the stress and changes of new business owners can boost the worker's loyalty to the company.

Is an ESOP the Best Bet for Your Firm?

Present trends reveal that there will be more Employee Stock plans in the coming years. However, before business owners make significant decisions, they will likely explore financial goals, success plans, and the employee's interest. 



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