Employee Stock Ownership Plans (ESOPs) seem to be generating more interest from business owners lately. While ESOPs have similarities to 401(k) plans, there are big differences. ESOPs have the unique right to borrow and own up to 100% of the company's common stock. ESOP assets are held in a tax-exempt trust and employees do not contribute anything personally.
An ESOP can provide business owners with tax-advantaged liquidity which continuing the legacy that the founders built. Implementing an ESOP can keep jobs in the local community as opposed to selling out to a competitor who might restructure and destroy the continuity of the business. Since an ESOP is a stock sale, it may also have some favorable advantages over an asset sale. The assets and liabilities of the company in an ESOP transaction are transferred as part of the sale immediately once the stock is transferred. In an asset sale the legal title of the assets have to be separately transferred. In addition, legal contracts of the company will typically continue to be in effect after the sale of stock while an asset sale can restrict rights to the buyer and may need to be amended. Finally, employee ownership works long-term. Employees are more inspired and productive in their daily jobs because their interests are more aligned with the goals of the company.
