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Employee Stock Ownership Plans (ESOP)

An Employee Stock Ownership Plan (ESOP) is a type of qualified retirement plan that provides employees an ownership interest in a company.

If you are a business owner, an ESOP can help you sell all or part of your company to your employees, creating an “employee-owned” company. Many business owners start an ESOP as a way to sell their company and eventually retire.

Here's how it works:

  1. The company forms a trust and establishes the retirement plan.
  2. The company obtains financing and lends the proceeds to the ESOP trust to buy out all or a portion of the owner(s) shares (optional).
  3. The company makes contributions to the trust annually.
  4. The trust uses the contributions to repay the loan.
  5. As the trust repays the loan to the company, shares are allocated to the employee accounts.
  6. When an employee leaves or retires, they typically redeem their shares for cash.

Benefits

ESOPs can provide a variety of benefits to you, your company and your employees:

  • You gain access to illiquid assets that are tied up in the business.
  • You can generally continue to work for the company, and the management team can retain control of the company.
  • You and the company can get tax advantages.
  • Your employees receive a retirement benefit.
  • Your employees gain a direct stake in the company’s success, often leading to increased satisfaction, motivation and retention.

Requirements

An ESOP could be an option if your company meets the following criteria:

  • C or S corporation
  • Stable business with established clients and markets
  • Demonstrated history of strong, predictable profits and cash flows
  • Experienced management team
  • At least 30 employees; high tenure, low turnover

Starting an ESOP

Generally, the steps to start an ESOP include:

  1. Determine feasibility
  2. Perform a stock valuation
  3. Hire an ESOP advisory team, including an attorney
  4. Obtain financing
  5. Establish the ESOP Trust

Timing varies, but it generally takes a minimum of six to nine months to set up an ESOP. Our ESOP team can help guide you through the entire process.

Want to learn more?

  • Go to ESOP Edge, our site dedicated to helping you manage your ESOP plan more effectively, or
  • Contact our ESOP team for more information or to find a financial professional in your area.

 

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For more information

Learn more about retirement plans;
visit The Principal Blog.

Have a question? Call us at 1.800.986.3343

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