If you want to set up an ESOP, you must first select an ESOP financial advisor / independent appraiser and an experienced ESOP attorney. Most regular corporate attorneys are usually not knowledgeable about ESOPs, and therefore a separate attorney specializing in ESOPs is needed to handle the complicated process of preparing all of the many documents required to form the ESOP and to conclude the first transaction.

The ESOP attorney and financial advisor, after a preliminary meeting with you, will develop a strategy and a structure for the plan. Once a feasibility study is completed, the ESOP attorney will begin to work with the advisor and the client.

The attorney might integrate an existing company profit sharing plan with the ESOP. All of the legal aspects of the plan will be included in the documents needed to start and operate the plan. Estimated attorney fees are in the $35,000 - $50,000 range. In addition to the appraisal fee for the updated appraisal and a Fairness Letter, both of which are used to start the plan, there is a charge for an actuarial accounting service used to keep track of the participants’ shares in the Trust. There are a number of professional record keeping firms that offer these services.

Traditionally, the corporation borrowed the needed funds from a bank or other institutional lender. The funds the company borrowed is then loaned to the ESOP trust, which bought the shares from the exiting shareholder(s), who, in turn, then invested the funds within 12 months in US domestic stocks Qualified Replacement Property (QRP) in order to defer the capital gains tax due.

The method of financing the purchase of the QRP requires a carefully developed plan, which the attorney will explain upon meeting with you.

As the corporation makes contributions on behalf of the participants, plus dividends, to the Trust, payments are made by the Trust to the client.

NOTE OF CAUTION! There are "packaged ESOP plans" available for at lower prices. Sometimes they will combine all three functions, which can affect the “independent third party” appraisal required by the IRS. The savings to a client, by installing an ESOP, is usually hundreds of thousands of dollars, therefore a properly prepared plan is well worth the cost. In the event that the plan is faulty and unacceptable to the IRS, you could lose all of the tax deferment and could incur a substantial tax burden plus penalties. It is usually years later before the IRS comes back with a rejection of an improperly prepared plan, in which event the selling shareholder loses his tax savings and must pay penalties.

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