Ten Steps to a Successful ESOP

Employee Stock Ownership Plans (“ESOPs”) are federally qualified employee benefit programs governed by U.S. law. Since our president and founder, John Menke, wrote some of the original ESOP legislation in 1974, more than 25 additional laws have been passed to promote and broaden the benefits of ESOPs. In general, ESOPs offer owners of companies tax efficient means to sell all or part of their shares to their employees, on a timeline of their choosing. ESOPs have the added benefit of energizing employees to increase sales and profits as these employees become “owners.” Shares sold to an ESOP are held in a trust: the employees receive beneficial ownership, while and in most instances the selling shareholder retains control. The formation of an ESOP does not preclude the company from going public or being sold at a later date. Below are ten steps to understanding, designing and implementing an ESOP that is ... Read More..

Stock Distributions – An Occasional Trap for the Unwary

Distributions from an ESOP in the form of shares of company stock have many advantages. One of the compelling reasons for making distribution in the form of company stock, for example, is that distributions in the form of company stock enable participants to have a portion of their distribution taxed at long term capital gains tax rates rather than having the entire distribution taxed at ordinary income tax rates. This tax benefit derives from IRC Section 402(e)(4)(B), which provides that the employee will not be taxed at the time of distribution on the net unrealized appreciation attributable to employer securities. The result is that the employee pays tax on the cumulative cost basis of the employer securities at the time of distribution, and pays a long term capital gains tax on the appreciation at the time that the stock is sold back to the plan or to the company, as ... Read More..

Faltering Economy Highlights Need for a Restructuring of America

Why Is It Necessary to Restructure America? Socialism and communism developed as a reaction to the concentration of ownership and the abusive labor practices that developed in the early stages of capitalism. However, after nearly a century of conflict between these two competing economic systems, a century that witnessed two world wars and a protracted cold war, we have seen in the past 10 years the almost complete collapse of all forms of socialism and communism which were based upon public or state ownership of the means of production. Today, China is the only major industrialized nation which still has an official policy of state ownership of the means of production, although here too this policy is being rapidly eroded by the growth of the private sector economy. However, despite the apparent triumph of capitalism over socialism and communism, despite the passage of labor law legislation during the New Deal ... Read More..

The Perfect Solution to the Perfect Storm: How an SR ESOP Can Be Used to Save Your Business from Bankruptcy

A “perfect storm” has hit the U.S. economy and its privately-held businesses. Consumer purchasing power has dried up, resulting in reduced revenues for almost all privately-held businesses. At the same time most banks have stopped or curtailed lending, and bank credit is no longer available to many businesses. During the past two quarters many businesses have downsized their operations and have implemented reductions-in-force, yet they are still faced with negative cash flows. Fortunately, there is a perfect solution to the negative cash flow problem that many businesses will experience for the rest of this year and most of next year. That solution utilizes a well-known tool that has been part of the tax code for over 35 years. It is a tool that is relatively inexpensive to implement and does not require the use of outside lenders or expensive factoring companies. The solution is to implement a Salary Reduction Employee ... Read More..

Four Ways That a Cash Flow ESOP Can Be Used To Help Your Company Survive the Credit Crunch

A “perfect storm” has hit the U. S. economy and its privately-held businesses. Consumer purchasing power has dried up, resulting in reduced revenues for almost all privately-held businesses. At the same time most banks have stopped or curtailed lending, and bank credit is no longer available to many businesses. ... Read More..

ESOP Marketability Discounts: Is the "Put Option" Argument Fallacious?

Virtually every ESOP appraisal that has been written in the past 10 years has concluded that, both in the case of purchases of company stock by an ESOP from direct shareholders and in the case of subsequent distributions and repurchases of company stock to and from plan participants, the discount for lack of marketability is greatly diminished by virtue of the ESOP “put option.” This article reviews the origin and development of the put option argument in the appraisal literature and concludes that (1) the put option argument is fallacious with respect to purchases of company stock from direct shareholders and (2) nevertheless, there should be no marketability discount with respect to purchases of company stock from direct shareholders. The issue of marketability discounts in ESOP transactions is an issue that has been crying out for clarification ever since the Eyler case was decided by the Tax Court in 1995 ... Read More..

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..

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..

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..

Why Giving To The Esop Foundation Is Now Critically Important

By John D. Menke Although the Employee Stock Ownership Plan (“ESOP”) concept continues to enjoy bipartisan support in Congress, this support is still not deep. Current support for the tax incentives that are essential to the adoption of new ESOPs comes from only a handful of key members of the House and the Senate.Meanwhile, during recent years many ESOP allies have retired or lost their seats. We now have fewer ESOP supporters than at any time during the last 20 years. This problem is compounded by the following unfortunate facts: First, most Congressional representatives rely heavily upon staff to advise them on proposed bills. These aides are recent university graduates with little or no knowledge of ESOPs; moreover, they tend to serve only a year or two before moving on to the private sector. Given their lack of knowledge of the benefits that ESOPs provide to American workers and business ... Read More..