The Benefits of ESOPs for Business Owners

February 13, 2024

Savvy business owners are always looking for strategies that will drive company success, harness the potential of their workforce, and further solidify the organization’s financial standing. One such strategy that is gaining prevalence, year after year, is Employee Stock Ownership Plans (ESOPs).

There are now over 6,000 U.S. ESOPs with over 10 million active participants, making it an increasingly popular business strategy and employee benefit in the United States. Business owners find that ESOPs are a great option if they want to transition out of the business over time. They are also a great fit for owners who want to make employees part-owners in the company, so they can share in the company’s success. 

Let’s explore the ESOP benefits that could redefine the way business owners cultivate company-wide engagement and secure a positive legacy.

Employee Engagement and Productivity Boost

High levels of employee engagement are critical for business success, employee retention, and company culture. With ESOPs, employees become employee-owners, so they’re going to be more vested in the business's success. This leads to great commitment and a proactive workforce. 

Team members are also more likely to have a “big picture” mindset, as employee-owners, which helps drive productivity and problem-solving. Attitudes shift from “not my problem” to “how can we solve this?” By valuing their contributions as an integral part of the company, ESOPs embrace a partnership culture where every success is shared, and each challenge is met collectively.

Financial Rewards for Business Owners

Business owners have the potential to benefit from ESOPs in other ways, too. One of the key business owner advantages of leveraging an ESOP is the opportunity to sell your shares at a fair valuation

ESOPs allow business owners to reap financial rewards without the need to identify external buyers who may not share the same vision for their business's future. This facet of ESOP benefits means you can ensure your company’s continuity and legacy, with the peace of mind that it is left in the hands of individuals who deeply care about its success.

Tax Advantages for Business Owners

As covered in this recent article, the tax advantages that can be unlocked with ESOPs can be split into two groups: C corporations and S corporations:

ESOP Tax Benefits For C Corporations

  • Contributions for Loan Payments: Contributions used to pay ESOP loan interest are tax-deductible. Contributions used to repay ESOP loan principal can also be deducted from up to 25% of covered payroll.
  • Additional Contributions: Non-elective contributions up to a further 25% of covered payroll can be deducted.
  • Seller Tax Deferment: Sellers owning at least 30% of the company stock can defer taxation on their gains. They can reinvest the proceeds from the sale in other securities and continue to defer taxation.
  • Dividend Deduction: Cash used to pay company stock held by an ESOP is deductible, so long as the dividends are used to repay the ESOP loan or are passed through to employees.

ESOP Tax Benefits For S Corporations

  • Tax Exemptions: Owners are not taxed twice on the ownership percentage held by the ESOP. Profits attributed to the ESOP are exempted from federal and sometimes state income tax. That means, for instance, that there is no income tax on 30% of the profits of an S corporation with an ESOP holding 30% of the stock, and no income tax at all on the profits of an S corporation wholly owned by its ESOP. Note, however, that the ESOP still must get a pro-rata share of any distributions the company makes to owners.
  • Full Ownership Benefits: If an S corporation is 100% ESOP-owned, the ESOP shareholder is tax-exempt from federal income and most state income tax. However, ESOPs must provide broad-based employee coverage to prevent abuse, as per Section 409(p).

Business Owner Advantages to Choosing an ESOP Model

For a visionary business owner looking for a succession strategy that sustains the company's ethos and solidifies its legacy, an ESOP can be a great option. 

If you are interested in leveraging ESOP benefits for your organization, book a consultation with Aegis. Our specialized expertise can help you align your interests with your company’s long-term success. Let us help you navigate the complexities and position your company to reap the full array of benefits an ESOP has to offer. 

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Get in touch with us to see how we can help your company transition to an ESOP or provide ongoing trustee services.

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