What are the benefits to the business owner who sells some or all of his corporate shares to his newly formed ESOP?
There are a number of very important benefits. Those listed below are benefits that we have learned from dozens of owners who have installed an ESOP at their company:
Leaving a Legacy
You leave a legacy to those loyal employees who have helped you build a profitable business. They will enjoy the funds from the shares they sell back to the ESOP or the company that they receive upon departure or retirement from a firm they helped to build.
Avoid Paying Capital Gains Tax
By following the guidelines you will avoid paying any capital gains tax on the sale of your shares. As of this writing the federal rate is 15%. Please check your own state’s tax rate on capital gains, and then add them together to determine the exact amount of your savings. If your basis is $1,000 when you started years ago and today the fair market value is $6,800,000, your savings will be approximately $1,474,000 (assuming your state’s tax rate is 6%).
Editors note: We mention the tax savings as the key benefit. However, after many discussions with selling shareholders, we have come to realize that their employees’ well-being is as important as their tax savings.
Creating an Ownership Culture
Management that successfully markets the ESOPs’ benefits to its employees and creates an “ownership culture” will be rewarded with a profit-minded and loyal staff. Those companies that take full advantage of the ESOP find their sales grow and profits increase as a result.
Ease for Departing Partner(s)
An ESOP is especially useful if there is a partner wishing to retire. A trust can be created to buy out the first exiting partner. Later, when the remaining partner wants to leave, the ESOP is there to purchase his/her shares.
Ease of Sale
If you decide to install an ESOP in order to sell your shares of stock, you won’t have to find a buyer and give a broker an exclusive sales agreement, negotiate the price, arrange financing or sit through a closing plus pay a substantial broker’s commission - all of which can take months or sometimes even years.
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