A special note from CAPSTONE on the Tax Cuts and Jobs Act 20-Oct-2017
Chad Connery Joins CAPSTONE as Director 28-Sep-2017
DOL Overtime Rule Declared Invalid
Tuesday, 7 March 2017
ESOP – Is it an Option for My Exit Strategy?
A few years ago, December 2013 to be exact, with the help of Gregory Brown, now a partner at Holland & Knight in Chicago, we presented this email because of interest that is periodically raised about ESOPs. Before folks even begin to think about an ESOP as a viable alternative as an exit strategy, they should consider the characteristics of a company that even qualifies to become an ESOP. The following is a list of characteristics that reflect eligible candidates for an ESOP:
· Revenues should be a minimum of $10 million
· EBITDA should be in the $2-$3 million range
· Number of employees should be in the 25-30 range
· Minimum of 11 employees to actually operate the ESOP plan
· The business should have a value of $15-$20 million
One of the advantages of an ESOP is its tax-deferred treatment of the sale. Until the current Congress decides how these aspects of the tax code may change, there is some risk to pursuing this ESOP conversion. Below, you will find the information that we shared in December 2013. Take a look and let us know if you agree that the information is still relevant and how it has assisted you in your business planning.
Is an ESOP Appropriate for Your Company?
What is the best legal structure for you? ESOP?
It is an ever-changing business environment in which we, as business owners, operate and live. It’s been stated that if you are NOT constantly reinventing yourself, then you are falling behind. To that end, we at CAPSTONE Business Advisors constantly strive to stay informed and help our clients and friends stay current on things that matter to business owners. One of the often misunderstood strategies in business is what type of ownership is best. Of course, that historic meaningless but accurate answer is: “It depends.” This month we wanted to share with you one of these ownership options: the ESOP. The following was provided to CAPSTONE by Gregory Brown, Partner, Katten Muchin Rosenman LLP in Chicago.
Is an ESOP Appropriate for Your Company?
What is an ESOP?
Employee Stock Ownership Plans, or ESOPs, are innovative, exciting and—because they involve employee ownership of the company where they work—controversial. These plans can help to achieve multiple corporate ownership goals. When used appropriately, ESOPs play a unique role in employee compensation and corporate succession.
ESOPs are often promoted as a means of giving workers “a piece of the action.” ESOP advocates claim that employee-owners have a greater incentive to produce, since they share in the fruits of their efforts. Indeed, many companies have shown impressive productivity gains after establishing an ESOP. But it would be a mistake to assume that every ESOP will result in improved corporate performance. Companies not willing to adapt to the special dynamics of employee ownership and to put forth the extra effort often needed to make the ESOP successful may not be able to realize all the benefits ESOPs can provide.
How and ESOP Works
An ESOP is a tax-qualified, defined-contribution employee benefit plan that invests primarily in the stock of the employer. As a tax-qualified plan, an ESOP provides meaningful tax benefits to the employer and its owners. In exchange, the ESOP must meet certain U.S. government rules designed to protect the interests of plan participants.
To set up an ESOP, an employer creates a trust fund for employees and funds it in one of three ways: (1) by contributing employer stock, (2) by contributing cash to buy employer stock, or (3) by having the plan borrow money to buy shares, after which the employer makes payments to the ESOP to repay the loan. Employer contributions—not employee contributions—are normally used to fund the plan.
Uses of ESOPs
ESOPs can be used for many purposes, such as:
ESOP Tax Incentives
Employees participating in an ESOP are not taxed on stock allocated to their accounts until they receive distributions when they leave the company. Additionally, ESOPs offer four significant tax advantages for corporations and selling shareholders:
An employer should carefully consider whether the business has the characteristics that foretell a potentially successful ESOP. Among these factors are the following:
Posted on 03/07/2017 3:15 AM by Capstone Business Advisors
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