An ESOP is a very flexible instrument that uses tax-deductible
or “tax-free” dollars to achieve a variety of corporate
objectives, as outlined below:
A. Provide a market ( at fair market value) for partial or complete sale by
existing shareholders with a "tax-free rollover" treatment
if ESOP ownership is 30% or greater.
B. Make tax-deductible contributions and loan
principal and interest payments via the ESOP. (Professional Service Companies make reimbursable contributions and
loan payments.)
C. Provide for the acquisition or divestiture of a company or division using pre-tax funds.
D. S corporation stock owned by an ESOP is not subject to
federal tax.
E. Allow tax deduction for dividends paid to
employees, or used to repay ESOP debt.
F. Convert an existing Profit Sharing ( or Money
Purchase) Plan into an ESOP whereby the funds can be made available for the
purchase of new company shares and/or existing stock.
G. Raise working capital by selling newly issued stock
to a leveraged ESOP, or refinance existing debt by contributing stock
to the ESOP and deducting the full value of the contribution.
H. Recapture up to 2 years' prior federal taxes paid.
I. Other applications include privatization, perpetuation,
an IPO alternative, charitable giving, going private, and 401(k)/ESOP
combination plans.
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