WinSystems, an Employee-Owned Corporation on Youtube

Here is a video posted by one of The Menke Group’s Clients: WinSystems, an embedded PC designer and manufacturer, provides a high level of quality and customer service through an Employee Stock Ownership Plan (ESOP). This leads to employees holding a direct stake in maintaining a high level of customer service. Here is the full press-release: WinSystems Adopts Employee Stock Ownership Plan September 19, 2007, Embedded Systems Conference, Boston, MA Jerry Winfield, President of WinSystems, today announced that the company has instituted an Employee Stock Ownership Plan (ESOP) and now joins a growing list of successful companies whose employees are stockholders. This corporate structure offers stability and longevity for the WinSystems Corporation insuring long-term availability of products for our customers. This is very important for industrial OEMs using embedded PC technology for their ongoing and future applications. “Acquisitions happen during a market consolidation or when an owner seeks an exit ... Read More..

ESOP plans let founders cash out and employees cash in

By Nancy Mann Jackson, contributing writer June 17, 2010: 4:45 AM ET (CNNMoney.com) — On his 81st birthday, entrepreneur Bob Moore signed the papers to hand nearly a third of his company over to his 200 employees. But it’s a gift Moore and his three partners hope will pay off for them as well: By launching an employee stock ownership plan, they’re creating an exit strategy for themselves from the business they’ve spent the past three decades building. We’re growing old,” says Moore, who launched Bob’s Red Mill Natural Foods in 1978 in Milwaukie, Oregon. “We started wondering, ‘What are we going to do with this company?’ We could position it to sell it, but we just felt that the people in this company deserve to have it. They have made it what it is.” An ESOP allows a company to gradually buy out its existing owners. Typically, the company ... Read More..

ESOPs for Banks and Thrifts

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ESOPs for Architectural & Engineering Firms

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S Corporation Rules Involving Section 409(p)

Section 409(P) of the Code, which was enacted as part of the Economic Growth and Tax Relief reconciliation Act of 2001, sets forth anti-abuse rules for ESOPs that are maintained by S corporations.  The following is to summarize the restrictions of Section 409(P), as follows: Basic Rule:  No assets of an ESOP may be allocated (directly or indirectly) for the benefit of any Disqualified Person if, at any time during the plan year, Disqualified Persons, in the aggregate, own 50% or more of the equity of an S corporation.  Thus, the test can be broken down into two steps:  Step One — identifying the Disqualified Persons, and Step 2 — determining whether they own at least 50% of the equity. Consequences:  If an S corporation ESOP fails this test, then the result is a Non-allocation Year. If a Non-allocation Year occurs, then the plan loses its exemption from the unrelated ... Read More..

Exit Strategies

The exit strategies available to owners of electrical wholesaling firms are somewhat limited. The available strategies include selling the business to a competitor, selling the business to the management employees, or selling the business to all of its employees under the provisions of an Employee Stock Ownership Plan (“ESOP”). ... Read More..

22 ESOP Myths And Misconceptions

Click here to download the full article in pdf format ESOPs were first authorized by federal legislation in 1974. Since that date, there have been more than 25 separate pieces of legislation that have further defined what an ESOP is and what an ESOP is permitted to do. Despite this fact, there are more misconceptions about ESOPs than about any of the other similar financial tools that exist in the marketplace. The following describes some of the more prevalent myths and misconceptions regarding ESOPs. Hopefully, the explanations provided below will help to dispel many of the misconceptions that currently exist regarding these matters. Misconception # 1 ESOPs can only be adopted by regular C corporations False. More than half of all new ESOPs are installed by S corporations. Originally, ESOPs could only be adopted by regular C corporations. However, as a result of legislation in 1996, ESOPs can now also ... Read More..

ESOPs: Uses, Advantages, and Illustrative Case Histories

USES OF AN ESOP A Readily Available Market for Controlling Shareholders Frequently, controlling shareholders desire to sell a part of their shares in order to diversity their holdings, or to provide liquidity for investment or estate planning purposes. Usually, however, there is no market for the sale of a minority interest in a closely-held company. The adoption of an ESOP solves this problem by providing a readily available market for the purchase of shares from controlling shareholders. Moreover, the ESOP enables a shareholder to sell tax-free, provided that the ESOP acquires at least 30% of the outstanding shares. A great deal of flexibility is available in structuring sales to the ESOP. If a shareholder desires immediate liquidity, the plan may obtain a bank loan and purchase the shares for cash. If a shareholder does not need immediate liquidity, he may defer the tax on the sale by selling his shares ... Read More..

ESOPS vs. Profit Sharing Plans

WHAT IS AN ESOP? The best way to explain an ESOP is to compare it to a profit sharing plan. ESOPs can do all the things a profit sharing plan can do. However, ESOPs can do a great many things that profit sharing plans cannot do. Profit sharing plans are regarded primarily as employee benefit plans. The ESOP is primarily regarded as a “tool of corporate finance,” according to IRS rulings and regulations. Accordingly, ESOPs are permitted under profit sharing plans. If one carefully analyzes the pros and cons of ESOPs versus profit sharing plans, the ESOP is almost always more beneficial both for the employees, the company, and the shareholders. SHAREHOLDER BENEFITS In the case of a profit sharing plan, the contribution is usually in cash, and the cash is invested in other investments. As a result, these contributions do not benefit either the corporation or the shareholders. In ... Read More..

ESOP: A New Tax Savings Tool for Owners of S Corporations

“A new dawn greets ESOP companies!” “The Holy Grail of business opportunities beckons: ESOP companies can now operate tax free!” Not since 1984, when the §1042 tax-free rollover was enacted, has the ESOP community bubbled with such enthusiasm. Under the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001, (“EGTRRA”), the ESOP’s share of S corporation earnings will not be subject to federal corporate taxation or to taxation as “unrelated business income tax,” unless the ESOP runs afoul of certain “anti-abuse” provisions. Thus, in the case of an S corporation that is 100% owned by its ESOP, the company’s earnings will be entirely tax exempt. Even the least ebullient of practitioners note that fiduciaries of existing ESOPs now confront a new obligation: to assess whether electing S status would benefit the company and the trust beneficiaries. A Bit of History Until the Small Business Job Protection Act ... Read More..

ESOPS and Employee Productivity

USING ESOPS TO IMPROVE EMPLOYEE PRODUCTIVITY You’ve read about them—companies that seem to have found the key to success in an unstable business environment: “Sales Jump 312% as Employees Learn Rules of the Game” at Springfield Remanufacturing Corporation in Missouri. Management Accounting. Inc. magazine awards its Entrepreneur of the Year award to all 240 owner-employees of the Connecticut firm Reflexite, Inc. Out of 2,700 private companies evaluated, 4 of the 5 finalists had substantial employee ownership. Inc. ... Read More..

The ESOP Association 2009 Year-End Legislative Update

S. 1612 – The ESOP Promotion and Improvement Act of 2009: On August 6, 2009, Senator Blanche L. Lincoln (D-AR) introduced S. 1612, the ESOP Promotion and Improvement Act of 2009. The legislation has four sections, including an entirely new proposal to remove a 35 year bias against ESOP companies by the Small Business Administration. One, S. 1612 would repeal the punitive 10% penalty tax on S corporations distributions from current earnings, also referred to as dividends, placed on the distributions from current earnings that are passed through to ESOP participants in cash. Two, S.1612 would clarifY that dividends paid by C corporations on ESOP stock are not a preference item in calculating the corporate alternative minimum tax. Three, S. 1612 improves the 1042 ESOP tax deferred rollover provisions by (a.) permitting sellers to the ESOP of an S corporation to utilize the ESOP tax benefit referred to as the ... Read More..

ESOPs as Retirement Benefits: An Analysis of DOL Data

Fall 2010 Written by Loren Rogers In a project funded by the Employee Ownership Foundation, the NCEO did an extensive analysis of ESOP companies using data from the US Department of Labor. Unlike prior research, the study carefully compiled data from multiple plans within a single company and used multiple years of data for each plan. It concluded that ESOP companies are more likely to offer a second defined contribution (DC) plan than non-ESOP companies are to offer any DC plan at all. ESOP companies also contribute substantially more to their ESOPs than companies with non-ESOP DC plans contribute to their DC plans. The average ESOP participant has 20% more DC assets than the average participant in a non-ESOP DC plan, and those assets are much more likely to come from the company. Considering only DC assets originally contributed by the company, ESOP participants have approximately 2.2 times as much ... Read More..

The ESOP Association and the Employee Ownership Foundation Release Results of the 2010 ESOP Company Survey

August 11, 2010 The ESOP Association and the Employee Ownership Foundation released today the results of a survey conducted among the Association’s 1,400 corporate members in the first quarter of 2010 which confirms positive benchmarks for ESOP (employee stock ownership plan) companies. The company survey is conducted every five years and was last completed in 2005. Prior to 2005, the survey was completed in 2000. The eye-opening statistics of the 2010 survey are the increase in age of the ESOP and account balances. In 2010, the average age of the ESOP was reported to be 15 years as opposed to prior years where the ESOPs reporting where much younger. In addition, the average account balance has risen dramatically to $195,222.65; a much higher figure which correlates with the age of ESOPs participating in this year’s survey. The eye-opening statistics of the 2010 survey are the increase in age of the ... Read More..

Ross Group Inc. Rewards Employees With Stock Ownership Plan

Ross Group Inc of Dayton, Ohio announced that the company has formed an Employee Stock Ownership Plan (ESOP) and has joined the growing list of companies whose employees are stockholders. “When the transaction is completed,” said Mr. Mark Ross, President and CEO, “the employees of Ross Group Inc will own just under 25 percent of the Company.” Mr. Ross said, “We had an immediate need for one of our shareholders to exit, but beyond that, the ownership team wanted to find a long term solution that would provide an exit strategy alternative for the remaining owners as we neared retirement age. It seemed only right to us that the company should be sold to the employees. Without the loyalty, dedication, and hard work of this fine group of individuals, we certainly would not have grown as much as we have.” “The Plan has two objectives,” Mr. Ross indicated. “First, to ... Read More..

Clif Bar Announces ESOP Program

Wednesday, June 30, 2010 Clif Bar & Company announced the selling of family owned common stock to its employees through an employee stock ownership plan (ESOP). Employees through the ESOP own 20% of the company, while husband and wife owners Gary Erickson and Kit Crawford retain the remaining 80%. No change in management structure will take place, with Erickson and Crawford remaining majority owners and co-CEOs of the company. “All along we wanted to create a company where we would want to work,” said Crawford. “Employee ownership is one more way we could run a different kind of business: one that inspires a team of people to make the kind of delicious, nutritious food we’d like to eat, and that strives for a healthier, more sustainable world.” “By retaining private, employee ownership we will continue to have the freedom and flexibility to build a sustainable business with long-term focus for ... Read More..

PRESS RELEASE – Technomics, Inc. Benefits Employees with Stock Ownership Plan

FOR IMMEDIATE RELEASE Technomics, Inc. Benefits Employees with Stock Ownership Plan Arlington, VA – January 26, 2010 Rick Collins, President and CEO of Technomics, proudly informed employees on January 26, 2010 that the Company formed an Employee Stock Ownership Plan (ESOP) and, in doing so, has joined the growing list of companies whose employees are stakeholders. “The Plan has several objectives,” Mr. Collins indicated. “First, to provide ownership of the company to those that build the company; second, to provide a significant retirement benefit and a reason to want to make the company more successful; third, to provide a tool to motivate, retain and attract employees; and finally, to create a market for stock held by original owners without a sale to outside interests. The plan should result in increased employee incentives and provide them with long-term retirement benefits. We also hope the ESOP will encourage employees to create opportunities ... Read More..

RESILIENCE AND RETIREMENT SECURITY: Performance of S-ESOP Firms in the Recession

Written by Phillip Swagel and Robert Carroll Executive Summary A study of a cross-section of Subchapter S firms with an Employee Stock Ownership Plan shows that S-ESOP companies performed better in 2008 compared to non-S-ESOP firms along a number of dimensions, including job creation, revenue growth, and providing for workers’ retirement security. The S-ESOPs paid their workers higher wages on average than other firms in the same industries, contributed more to their workers’ retirement security, and—crucially in a year of recession—hired workers when the overall U.S. economy was pitched downward and non-S-ESOP employers were cutting jobs. S-ESOPs help prepare ESOP participants – the workers – for a more economically secure retirement. Employee-owners accumulate shares of company stock as part of their compensation in addition to their wages and other benefits such as health insurance. This is a meaningful contrast between S-ESOPs and other firms: nearly 60 percent of working Americans do not have any ... Read More..

ESOP: Employee Ownership of Companies on the Rise

The ESOP – Employee Stock Ownership Plan – is, slowly, on the rise. These worker-owned businesses are more productive and could benefit the American economy. Shoppers eye goods at the bakery of King Arthur Flour Co. in Norwich, Vt. The employee-owned firm was able to expand from its niche to deliver a broad product line. Norwich, Vt. A decade ago, John Schock of Pasadena, Md., reached his mid-50s and a crossroads. He could fund his retirement by selling off his financial-services firm to another company. But he wanted to assure the future of FMS, the firm he’d founded in 1974. “If there isn’t a solid succession plan for key management and staff, then a company can fail after the founder leaves,” Mr. Schock says. So he took the unconventional route: He sold FMS to his workers, all 35 of them, by creating a tax-advantaged Employee Stock Ownership Plan. They got ... Read More..

ESOPs on the Rise Among Small Businesses

Small companies are rushing to reward workers with employee stock ownership plans as low valuations make awarding shares more attractive By Karen E. Klein Bob Moore gathered three employee shifts together last month for pizza parties to celebrate his 81st birthday. But Moore, the founder and president of Bob’s Red Mill Natural Foods in Portland, Ore., also had a surprise announcement: He was giving his 200 employees the company he founded in 1978. “I thought some of them were going to kiss me,” Moore recalls. “It went over very, very, very well.” Moore and his partners researched their retirement options for more than a decade before settling last year on an Employee Stock Ownership Plan (ESOP). An ESOP is a tax-advantaged, qualified employee retirement plan similar to a stock bonus plan except that it can borrow money. ESOPs are typically created to buy out all or part of an owner’s interest in an ... Read More..

New Study Documents ESOP Account Balances

The NCEO has just completed an analysis of Form 5500 retirement plan filings filed by ESOP companies. The Form 5500 data are prone to considerable reporting and transcription error and should be used with caution, but many of the results described below are in accord with prior research, with our experience, and with best estimates from practitioners in the field. Among the companies studied, the average value of plan assets per participant is approximately $46,000. This compares to the average of $47,680 reported for the state of Washington in 1995 (See Wealth and Income Consequences of Employee Ownership by Peter Kardas, Adria Scharf, and Jim Keough, (Oakland, CA: National Center for Employee Ownership, 1998) and to an average 401(k) account balance of $58,000 in 2005 computed by the Employee Benefit Research Institute and Investment Company Institute. However, typically only one-third or less of 401(k) plan balances are attributable to company ... Read More..

An Open Letter to Business Owners

Dear Business Owner, Would you be interested in selling part or all of your stock in your company if you could sell it for more than twice what it is currently worth? Case Study I: The Benefits of a Gradual Sale to an ESOP We recently helped one of our clients do just that. Company X is a successful home health care company whose sales and profits have been growing at 15% per annum. The owner recently turned down an offer to sell his entire company for $6 million. Instead of selling the entire company now, we structured a transaction whereby the owner will sell 10% of his stock each year to an ESOP over the next ten years. As a result of selling his stock on a year-by-year basis at increasing prices each year, the owner of this company will ultimately receive over $14 million dollars for his stock. This ... Read More..

Why Should You Consider an ESOP?

Dear Reader: As president of Menke & Associates, Inc., I believe there is significant untapped growth potential in most privately held companies. Whether you want to sell some or all of your stock in the company in the next five years or whether you plan to remain active for the long term, Menke & Associates, Inc. proposes to work with you to develop a program which should help you achieve your growth potential and multiply the total value of your investment in the company. Our experience with more than 2,000 companies nationwide since 1974 proves to us that only on-site, hands-on owners consistently tap the energy, unlock the ingenuity, and muster the commitment necessary to make a business successful. After all, who cares whether the business succeeds or fails? Only owners really care. Over the past 35 years more than 40,000 U.S. company owners have taken advantage of this opportunity ... Read More..

The Origin and History of the ESOP and Its Future Role as a Business Succession Tool

The First ESOP (1956) San Francisco lawyer and economist Louis O. Kelso created the first employee stock ownership plan (ESOP) in 1956 as a way to transition ownership of Peninsula Newspapers, Inc. from its two founders (both then in their 80s) to their chosen successors, the managers and employees. Kelso had long believed that the company’s own employees should be the logical buyers and the ultimate owners; they were the ones who made the business successful in the first place, and the ones who knew the ins and outs of the business better than anyone else in the industry. The two founders had long wanted their employees to inherit ownership. They had promised that when the time came for them to retire, the employees would have the first right of refusal. They had seen too many of their competitors gobbled up by large newspaper chains, and they had seen the ... Read More..

Tax Alert for Business Owners

Dear Business Owner, This may be the opportune time to take action to avoid the increase in capital gains tax rates that will take effect after 2010. As you may know, the Bush tax rate cuts, including the current 15% capital gains tax rate, are slated to expire at the end of 2010. In addition, if the U.S. economy starts to turn around in the third or fourth quarter of this year, we believe there is a strong possibility that the Obama budget for 2010 will propose an increase in the capital gains tax rate starting in 2010 rather than in 2011. Assuming that you have an interest in locking in the capital gains tax at the current rate but do not wish to sell your entire company to a third party, there are two tax strategies that you can use to lock in the current capital gains tax rate, ... Read More..

New Law on S-ESOP Prohibited Allocations

MEMORANDUM From: Legal Department Date: January 2008 Subject: Prohibited Allocations in S Corp ESOPs Section 409(p) of the Code, which was enacted as part of the Economic Growth and Tax Relief Reconciliation Act of 2001, sets forth anti-abuse rules for ESOPs that are maintained by S corporations. The following is to summarize the restrictions of Section 409(p), as follows: Basic Rule: No assets of an ESOP may be allocated (directly or indirectly) for the benefit of any Disqualified Person if, at any time during the plan year, Disqualified Persons, in the aggregate, own 50% or more of the equity of an S corporation. Thus, the test can be broken down into two steps: Step 1— identifying the Disqualified Persons, and Step 2— determining whether they own at least 50% of the equity. Consequences: If an S corporation ESOP fails this test, then the result is a Nonallocation Year. If a Nonallocation ... Read More..

Highlights Of The Pension Protection Act Of 2006

I. PROVISIONS AFFECTING ESOPS S Corp UBIT Exemption The unrelated business income tax (“UBIT”) exemption that currently applies to S corporation ESOPs, together with the related §409(p) anti-abuse provisions, have been made permanent. These provisions were scheduled to expire at the end of 2010. As the result of PPA, these provisions have been made permanent, and S corporations that sponsor ESOPs will continue to be exempt from income tax and from UBIT to the extent that company stock is held by an ESOPs. ESOP Diversification PPA does not mandate any additional diversification requirements for ESOPs maintained by private companies. Similarly, PPA does not mandate any additional diversification requirements for ESOPs maintained by public companies, provided that the ESOP is a stand-alone plan. The following additional diversification requirements do apply for plan years after December 31, 2006 if the ESOP is maintained by a public company and the ESOP is combined with a ... Read More..

Highlights of EGTRRA 2001

I. INCREASES IN CONTRIBUTION, DEDUCTION AND BENEFIT LIMITS Contribution Deduction Limits. The limit on an employer’s deduction for contributions to a non-leveraged ESOP or a profit sharing plan is increased from 15% to 25% of participants’ aggregate compensation. 401(k) deferrals are not counted for purposes of the deduction limits. However, 401(k) deferrals will be included for purposes of calculating the compensation on which this limit is based. The deduction limit for money purchase pension plans remains at 25%. Effective: Taxable years beginning after 2001. Individual Benefit and Contribution Limits. The dollar limit on “annual additions” to a participant’s account in an ESOP, profit sharing, 401(k) or other defined contribution plan is increased to $40,000 in 2002. The alternative limit of 25% of compensation is increased to 100%. Effective: Limitation years beginning after 2001. Annual Compensation. The maximum annual compensation of a participant that may be used to calculate contributions and ... Read More..

Economic Growth and Tax Relief Reconciliation Act of 2001

Comparison of Old and New Provisions Current Law New Law (EGTRRA) I.  Increases in Contribution, Deduction and Benefit Limits Contribution Deduction Limits: An employer’s deduction for contributions (including 401(k) deferral contributions) to a profit sharing or stock bonus plan is limited to 15% of participants’ taxable compensation. The money purchase plan limit is 25%. The 15% deduction limit is increased to 25%. 401(k) deferrals do not count against the limit. Compensation used to determine deductions   includes deferrals. Money purchase plan limit remains at 25%. Effective: Employer’s taxable years beginning after December 31, 2001 Individual Benefit and Contribution Limits: Allocations of employer and employee contributions and forfeitures in a profit sharing, 401(k) or other defined contribution plan cannot be greater than the lesser of (i) 25% of gross pay or (ii) $35,000 (indexed). Allocations of employer and employee contributions and forfeitures cannot be greater than the lesser of (i) 100% of gross pay or (ii) $40,000 (indexed). Effective: Limitation years beginning after December 31, 2001 Annual Compensation: Currently a ... Read More..

New "Required Minimum Distribution" Rules

MEMORANDUM TO: ALL CLIENTS FROM: MENKE & ASSOCIATES, INC. LEGAL DEPARTMENT DATE: JULY 18, 2001 SUBJECT: NEW “REQUIRED MINIMUM DISTRIBUTION” RULES Depending on the terms of your Plan, participants who are age 70½ or older, are generally required to receive a distribution from the Plan every year. We will refer to this type of a distribution as a “Required Minimum Distribution” or “RMD”. Under the old rules, the annual amount of the RMD was calculated using life expectancy tables, but only after determining the participant’s beneficiary and the beneficiary’s age. In addition, the old rules included a cumbersome election concerning the method of determining the life expectancy. The IRS has recently issued newly proposed rules which adopt a simpler method for calculating the amount of the RMD. In almost all circumstances, one “Uniform Table” will be used for calculating a participant’s RMD. The new calculation rules will no longer consider who ... Read More..

New Requirement on Fidelity Bonding for Qualified Employee Benefit Plans

MEMORANDUM TO: ALL CLIENTS FROM: LEGAL DEPARTMENT DATE: JULY 18, 2001 RE: NEW REQUIREMENTS ON FIDELITY BONDING FOR QUALIFIED EMPLOYEE BENEFIT PLANS I. BACKGROUND Current regulations under ERISA require generally that all Employee Benefit Plans engage an Independent Qualified Public Accountant ( IQPA) to perform an annual audit of the Plan, and to include that accountant’s report as part of the Plan’s annual report. An exemption to this requirement has been given to small pension plans with less than 100 participants generally, due to the cost of an annual independent audit. Due to recent losses to small plans because of fraud or theft on the part of Plan Fiduciaries, the Department of Labor has come under pressure to take steps to insure that small plans assets are protected. In order to take steps to protect the participants of small plans, while not causing undue costs on small plans, the following ... Read More..

A Modest Proposal for a New, New Deal

Capitalism collapsed in the fall of 2008. It’s collapse was also the direct result of a flaw in the system. Capitalism promised universal opportunity and a rising tide for everyone. To achieve this result, capitalism privatized and/or deregulated every possible industry. It glorified greed, extravagant executive compensation, and financial manipulation. Just as in the case of communism, it failed to place any real purchasing power into the hands of the workers. Over the past 20 years, the economic purchasing power of U.S. workers has decreased by an alarming percentage, despite the overall growth of the U.S. economy. U.S. capitalism delayed the day of reckoning by devising a host of innovative but lethal financial tools such as subprime mortages, negative amortization loans, and credit cards and automibile loans that were issued with no questions asked. Now that the bubble has burst, the Goverment’s only solution seems to be a massive “stimulus” ... Read More..