Introduction to Stock Plans: Employee Stock Ownership Plans - 27 July 2009

Introduction to Stock Plans: Employee Stock Ownership Plans

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This
is part two of a three-part series introducing different stock plans
one should consider for their business. This is only meant to be an
introduction; a trusted professional should be contacted to discuss
what stock plan is right for your business. This second installment 
focuses on employee stock ownership plans.

An employee stock ownership plan (“ESOP”) is an employee benefit
plan similar, in some ways, to a profit sharing plan.  In an ESOP, the
employer sets up a trust fund, into which it contributes new shares of
its own stock or cash to buy existing shares of its stock. 
Alternatively, the ESOP can borrow money to buy new or existing shares,
with the employer making cash contributions to the plan to enable it to
repay the loan.  Regardless of how the plan acquires stock, employer
contributions to the trust are tax deductible, within certain limits.



Shares are allocated to individual employee accounts.  Although there
are some exceptions, generally all full-time employees over the age of
twenty one (21) participate in the plan.  Allocations are made either
on the basis of pay or some other formula. Once an employee leaves the
employer, assuming they are vested in the stock, the employee receives
the stock, which the employer must buy back from the employee at its
then fair market value (unless the stock is publically traded). 
Private companies must have an annual outside valuation to determine
the price of their shares, a valuation that can be very costly.



There are drawbacks to the use of an ESOP.  Private companies must
repurchase shares of departing employees, which can be a major
expense.  In addition, any time new shares of stock are issued, the
stock of existing owners is diluted.

This comes to us from the Pennsylvania Law Monitor - http://palawblog.stark-stark.com/2009/07/articles/business-corporate/introduction-to-stock-plans-employee-stock-ownership-plans/