Frequently Asked Questions

Employee Ownership FAQs

Common questions about employee stock ownership plans (ESOPs), employee ownership trusts (EOTs), and other forms of employee ownership, from the basics to technical topics.

This FAQ is written primarily for business owners, managers, and advisors involved in setting up or running an employee ownership plan. If you're an employee at an ESOP company looking to understand your own benefits and rights, see our articles on Working at an ESOP Company and The Rights of ESOP Participants.

Is government approval needed before an ESOP can be started?

No. You should submit a "letter of determination" to the IRS, but the IRS could take months or longer to respond. Meanwhile, you can go ahead with your plan. The letter of determination means the IRS has reviewed your plan and believes it complies with legal requirements, although it does not mean the IRS cannot later say it did not notice something that would cause disqualification, nor does it prevent the IRS or Department of Labor from bringing action based on plan operations. If the plan is set up by competent counsel, however, an IRS letter is essentially pro forma, and changes to address any problems can be made later. The initial review, moreover, is just of documents for the plan, not the transaction itself.

Link to this FAQ Topic: ESOP Basics & Feasibility