What Is an ESOP?
An ESOP Is a Qualified Plan Under the Employees Retirement Income Security Act of 1974 (ERISA). See Sections 401(a), 4975(e)(7) and 501(a) of the Internal Revenue Code of 1986, As Amended, and Section 407(d)(6) of ERISA, 1974. What you Can Do With This Powerful Tool of Personal Finance is Nothing Short of Amazing. An ESOP Is a Defined Contribution, Tax-Qualified Plan That Has Two Distinguishing Features: (1) An ESOP Is Allowed to Invest Exclusively in the Stock of it’s Sponsoring Company; and (2) an ESOP Can Borrow Money. A Sponsoring Corporation Can Contribute Cash or Stock to an ESOP on a tax-Deductible Basis, Increasing Cash Flow. Owners of Privately-Held Corporations Can Sell All or Part of their Stock to an ESOP for Full Fair Market Value, Often Completely avoiding Capital Gains Tax on the Transaction.
Why Consider an ESOP? Four Powerful Uses:
- Did you Know you Can Actually Purchase Capital Goods with Pre-Tax Dollars, if Structured Through an ESOP? Think of the Competitive Advantage
- Did you Know you Can Purchase Another Company with Pre-Tax Dollars, if Structured Through an ESOP? That Means you’ll Be Baying Only 66-Cent-Dollars for the Purchase of a Company. Compare That to the Normal After-Tax Cost of Approximately $1.52
- Did you Know you Can Refinance Existing Debt Through an ESOP and Fully Tax-Deduct Principal and Interest on the Repayment of the Debt? Sound Too Good to be True? That’s the Power of an ESOP
Benefits for the Shareholder:
- Tax-Deferred (Deferred Permanently, if Structured Properly) Transaction on the Sale of Stock to an ESOP (for Owners of ‘C’ Corporations)
- Seller Obtains Top Dollar, Controlling Interest Value on the Sale of Stock to an ESOP
- Shareholder Can Sell Stock and Remain in Control
- Seller Obtains Additional Annual Income Due to Investing Pre-Tax Dollars
- Seller Diversifies Investments (All of the Eggs Are No Longer in the Company Basket)
- Seller Obtains Liquidity and Flexibility for Estate Planning
- Seller has Control over the Sale of His/Her Stock and the Orderly Transfer of Management Responsibilities
Benefits for the Corporation:
- Corporation Obtains 100% Deductibility of PRINCIPAL and Interest on an ESOP Loan
- Corporation Can Fully Deduct DIVIDENDS Paid to Reduce ESOP Debt
- Corporation Experiences Increased Cash Flow Due to the Deductibility of Principal on an ESOP Loan
- Collateral for an ESOP Loan is Created Outside the Corporation
- Corporations Engaging in ESOP Transactions Often Obtain Preferred Terms on ESOP Loans
- The Selling Shareholder’s Retirement is Funded Outside the Corporation, Relieving the Company from the Burden of Funding Retirement Benefits
- Corporation Can Often Experience Increased Cash Flow Due to the Possible Reduction in the Seller’s Corporation-Provided Compensation
- Ability to Attract and Retain Productive Employees
- Creates a Take-Over Defense by Means of a Friendly Voting Block
- Ability to Give Employees Equity in the Company with No Payment on Their Part, on a Tax-Deductible Basis to the Corporation
- Corporation Can Refinance Existing Debt on a Tax-Deductible Basis
- Corporation Can Merge with or Acquire Another Corporation Using Pre-Tax Dollars
- Corporation Can Purchase Capital Goods Using Pre-Tax Dollars
- In Some Circumstances, Corporation Can Recover Taxes Paid in Previous Periods
- Corporation Can Increase its Net Worth and Appraised Value by Rolling Over Existing Qualified Plans into an ESOP
- Creation of a Quasi-Public Market for Corporate Stock – Go Public Internally. Employees Have a “Put Option” and a Market for their Company Stock. Increased Morale
There Is a Minimum 54% Tax Subsidy Available in All ESOP Transactions!
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