What is an ESOP? An ESOP is exactly what it sounds like, an Employee Stock Ownership Plan, the employees literally hold the stock to the company. The better questions are how do you go about implementing an ESOP? and what are the benefits? While a small percentage of ESOPs (which get most of the news coverage) are large publicly held companies that utilize the vehicle to stop a take over or to buyout a failing company, an overwhelming majority of ESOPs are enacted by smaller, closely held companies as a contribution to its employees. This can serve to motivate and empower your employees, but it can also serve to help in the borrowing of money for acquiring new assets in pretax dollars.
Banks are usually big fans of ESOPs because loans to ESOPs, which the Company can pay back the loans with pre-tax profits, are traditionally paid back more often and more quickly than regular business loans. The only real requirement for successfully setting up an ESOP is a sufficient positive cash flow. This is partly because employees are not allowed to make a personal guarantee with this arrangement. For a long time in Wisconsin, ESOPs were limited to C-Corporations, which thus limited its use. However, in 1998 the statutes were amended and now the entity du jour of small companies, LLCs and S-Corps are allowed to enact an ESOP. So, if you are a closely held company considering ways to expand, or to empower and motivate your employees, talk to an attorney about the possible benefits of an ESOP for your company.