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An Introduction to ESOPs

17th Edition

by Scott Rodrick

$2.00 for NCEO members; $3.00 for nonmembers

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This book is backordered until the next edition arrives from the printer in October.

This short book explains the rules, uses, benefits, and other aspects of employee stock ownership plans (ESOPs). It is useful as an introduction to the subject, as an accompaniment to a full-length book related to ESOPs, or as a concise reference for laypeople. Thousands are sold every year, making this our best-selling publication. When bought in quantity, they are usually purchased by consultants who give them to clients who are considering an ESOP; by companies who give them to employees; by people who give them out as part of an educational meeting on ESOPs; or by companies or consultants who give them to managers, boards of directors, or other company decisionmakers.

The 17th edition updates the existing material as of late 2017 (providing the 2018 figures for dollar limits) and adds more detail to explanations of matters such as seller financing, yearly allocations to employees, valuation, and the S corporation rules.

Ebook versions: Unlike most of our other books, this book is not available for sale as an individual PDF, but you can buy it as an ebook for the Amazon Kindle and all devices on which Kindle software can run (from Windows computers to Android phones and tablets), for the Barnes & Noble Nook, and at the Apple iBookstore.

Publication Details

Format: Perfect-bound book, 60 pages
Dimensions: 6 x 9 inches
Edition: 17th (November 2017)
Status: Backordered


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


Click here for excerpts from several chapters in PDF format

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.

As a tool of corporate finance. A leveraged ESOP can be used to borrow money that could be used to buy another company or new equipment, or to refinance debt. To accomplish these goals, the company issues new shares and sells them to the ESOP in a leveraged transaction, using the proceeds from the sale of new shares to finance acquisitions or to refinance debt. The company raises new capital by allowing the ESOP to buy new shares; this is funded by corporate contributions to the ESOP that come from pretax company cash flow. While this dilutes the ownership of the non-ESOP shareholders, it allows a much less costly repayment of the loan and simultaneously provides an employee benefit plan. If properly structured, the corporation's growth due to the additional capital will exceed the dilution caused by issuing new shares.

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.