Employee Stock Ownership Plans (ESOPs)

Starting a business takes a lot of hard work, alongside great risk. After spending years to build successful enterprises, our clients might seek to transition from full-time business owner to retiree, while at the same time still provide for their family. They want to convert the equity in their company into a secure nest egg and also be loyal to their employees and other stakeholders with whom they've grown close. In essence, they want to leave behind a legacy.

For many business owners in this situation, employee stock ownership plans (ESOPs) can provide significant tax benefits and be an effective business succession planning vehicle. Some of these benefits include:

  • Creation of liquidity at fair market value of company stock
  • Corporate perpetuation
  • Tax-advantaged financing by using pre-tax dollars to repay debt
  • Potential capital gain tax deferral and avoidance under Code Section 1042 for C-Corporations
  • S-Corporations owned by ESOPs are not subject to federal income tax
  • Attraction and retention of key employees
  • Motivation for employees to think like owners

Reaping these benefits can be time intensive and complex. Our attorneys have in-depth experience handling the routine aspects of ESOP management including plan drafting, periodic compliance amendments, summary plan descriptions, plan administration counseling and fiduciary best practices. Our attorneys work with ESOP lenders, trustees and selling shareholders, and we help our clients address all aspects of leveraged ESOP transactions, including ESOP loan documents, security/pledge agreements, Code Section 1042 tax-free exchanges, Code Section 4975 prohibited transaction rule compliance, annual valuations and S corporation/ESOP tax avoidance strategies.