Employee Stock Ownership Plan

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Description of Employee Stock Ownership Plan. Explanation.

All about Employee Stock Ownership Plan

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Definition Employee Stock Ownership Plan. Description.

An Employee Stock Ownership Plan is an organized plan allowing certain managers and/or employees to buy shares of their company's stock at a discount or other attractive terms. It is a form of employee benefits that allows employees to participate financially in their own organization by investing in company stock and thus becoming shareholders.

The money to pay for the stock is normally withheld from the employee's salary.

Purposes of Employee Stock Ownership Plans. Goals

RETIREMENT: Employee retirement benefit plan.
CORPORATE FINANCE: Encouraging employee ownership of the company.
MOTIVATION: Due to the employees' ownership of the company, their motivation increases and is more aligned with the interests of the company.

Non-tax benefits of Employee Stock Ownership Plans. Advantages

Allow the owner (or shareholders) of a closely held business to sell part of their interest.
Improves the companys cash flow because the sponsor contributes company shares, rather than cash.
Can alternatively be used to raise capital by selling newly issued shares.
Provides employees with both retirement benefits and added incentives from having an ownership interest.
Stock is traded for wage or other benefit concessions from the participating employees.

Tax Advantages of ESOPs. Benefits

Of course, the tax benefits of ESOPS differ per jurisdiction (country). However usually an Employee Stock Ownership Plan is a tax-efficient way of providing motivational benefits. Typically:

Sellers of stock to the ESOP fund can defer any capital gains tax (under certain circumstances).
Interest and principal are potentially tax deductible.
Dividends paid on ESOP shares are tax deductible when passed through directly to employees.
Participating employees are not subject to tax until the benefit is actually distributed. At that moment they normally are in a lower tax bracket.

Creating an Employee Stock Ownership Plan. Steps

The company creates a trust for benefit of company's employees.
The company (or its shareholders) sell stock to the trust.
Participating employees are allocated stock periodically (each year), based on the plan's vesting schedule.
The employee receives shares (or cash equivalent) after leaving the company.

Compare: Employee Benefits.

Also referred to as Stock Purchase Plan.

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