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An Introduction to ESOPs
by Scott Rodrick
$2.00 for NCEO members; $3.00 for nonmembers
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The 13th edition updates the existing material as of late 2012 and adds some additional clarifications.
PDF version: Unlike most of our other books, this book is not available for sale as an individual PDF, but you can buy it on Amazon as a Kindle book or at Barnes & Noble as a Nook book. If you are an NCEO member and would like to obtain a PDF with your firm's name on it that you are licensed to give to clients (if you are a service provider) or employees (if you are an ESOP company), contact the author, Scott Rodrick, at firstname.lastname@example.org to discuss the matter; this may involve a substantial fee.
Format: Perfect-bound book, 60 pages
Edition: Thirteenth edition (December 2012)
Status: In stock
Chapter 1: What Is an ESOP?
Chapter 2: Types of ESOPs and Their Financing
Chapter 3: ESOP Tax Incentives
Chapter 4: Uses of ESOPs
Chapter 5: Valuing the Company Stock
Chapter 6: ESOPs for S Corporations
Chapter 7: Contribution and Allocation Limits
Chapter 8: Employee Coverage and Entitlement to Benefits
Chapter 9: Distributing Proceeds to the Participants
Chapter 10: Fiduciary Matters
Chapter 11: The Rights of ESOP Participants
Chapter 12: Is an ESOP Right for Your Company?
Chapter 13: Implementing and Administering an ESOP
Chapter 14: A Final Caveat
From Chapter 4, "Uses of ESOPs"Aside from their obvious use as a tax-advantaged way of providing an employee benefit, ESOPs have a variety of special applications, such as the following.
For business continuity. The most common use of an ESOP is to sell part or all of an owner's interest in a closely held company. In this situation, an ESOP provides substantial advantages over other alternatives:
- It provides a ready market for the stock.
- The company can fund the transaction with pretax dollars.
- The owner(s) may sell to the ESOP partially, or in stages over a period of years so they can gradually ease out of the company—a particularly important consideration for sellers with management responsibilities.
- In a C corporation, the selling owner(s) may defer taxation on the gains by using the Section 1042 "rollover" explained above.
- In an S corporation, distributions that would otherwise be used for shareholders to pay taxes on S corporation income may be used to fund a portion of the ESOP share purchase.
Either the ESOP borrows money or, more commonly, the company borrows money and relends it to the ESOP. The ESOP then buys stock from the company, which repays the loan and deducts both the principal and the interest. Companies have used leveraged ESOPs to refinance debt, buy stock back from a public market, acquire assets or other companies, and buy out owners.