As a business owner, you may want to take your company to the next level. One way to do that is by offering stock to employees. An Employee Stock Ownership Plan (ESOP) offers some benefits for companies. There are many things to consider when deciding whether to make your company an ESOP. An experienced business attorney will provide guidance.
What is an ESOP?
An ESOP is a benefit plan that provides shares of stock to employees. It gives employees an ownership interest in the company for which they work. Often, employees may receive shares of stock as part of their benefits and over time, an employee may be vested. The program can be structured specifically for your company, with rules and guidelines to administer the plan. Employees with shares of stock have a strong interest in making sure the company is profitable. An ESOP can make employment more attractive and can help to improve turnover rates as well as provide some tax incentives to the company.
Starting an ESOP
An ESOP generally begins with the formation of a trust fund. The company will begin the trust by issuing new stock shares or by purchasing existing stock shares. The company may use existing cash to buy stock for the trust, or they may need to borrow money through the entity for the shares. The company must appoint a trustee as the fiduciary to oversee the ESOP. An ESOP must act without discrimination, allowing employees to participate equally. Employers may tie the distribution of the plan to vesting. Employees may receive shares as incentives and might be tied to performance.
Vesting
Employees can accumulate shares of stock over time. An employee, for example, may earn a specific number of shares per year, with an increase in shares when they reach milestones. Employees may only receive the cash value of the stock when they retire or when they end employment with the company. The company may require an employee to work a specific number of years before they are vested. When an employee is vested, they are allowed the full stock value. If an employee terminates employment before they are vested, they will receive a lower amount of money.
How an Employee Receives Money From an ESOP
Employees generally do not take stock with them when they leave employment. Instead, the company buys back stock from an employee and provides them with the value. An employee may cash out their shares when they retire, terminate employment, retire, die, or become disabled. Distributions for retirement are usually based on the age of the employee. If an employee retires early, they may have to pay a penalty. You will determine the specific rules when you set up your ESOP.
An employee may receive payment in a lump sum or in periodic payments. An employee may be eligible to receive dividends or borrow money based on their stock participation. When an employee who is fully vested leaves employment, the company essentially buys back the shares of stock and provides payment. The company may redistribute the shares, or they may void them.
It is essential for a company to properly structure and administer its ESOP. A knowledgeable attorney will assist you in creating an ESOP that meets your needs. To learn more about setting up an ESOP, contact us at (608) 784-8310 or email us online.