Company
- Substantial tax savings (up to 100%)
- Corporate perpetuation
- Cash flow increased
- Pre-tax dollars repay debt
- S corporation stock owned by an ESOP is not subject to federal tax
- Tax-deductible dividends
- Net worth increased
- Provides a match on employees’ 401(k) deferrals
- Justified accumulated retained earnings
- Buy/sell agreements funded with pre-tax earnings
Stockholders
- Creates liquidity at fair-market value
- Control maintained (if desired)
- “Tax-free” rollover treatment available to sellers in closely-held companies
- Establishes valuation and provides liquidity for estate tax purposes
- Selling stockholder-employee participates in ESOP if “rollover” not elected
- Selling shareholders excluded from ESOP participation can be “made whole”
- Additional equity incentives still available
Employees
- Employees share in equity growth of company
- ESOP employer contributions tend to be larger than profit sharing contributions
- Proven motivator, builds unity, and team spirit
- Accounts accumulate tax-free. Tax favored at distribution
- Employees can realize dividend income
- Buy/sell agreements insure future employee ownership through the ESOP
- 401(k) plans can be enhanced with ESOPs