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ESOPs have tax and planning advantages that can make them attractive ways to transition a business, reward employees, or finance growth. But their biggest advantage may be the competitive edge they provide. 

By NCEO Founder Corey Rosen

Congress designed ESOPs to be the most cost-effective means for both owners and companies to provide for business transition. There is also no better way to preserve the legacy of your business and keep your options open for your role in the company going forward.

Understanding what is in your ESOP account and what the rules are for when and how you will get it can seem complicated. While there are general rules all ESOPs must follow, plans do vary from company to company.

While ESOPs are the most tax-favored and fiduciarially sound way to share ownership with employees, 401(k) plans provide an alternative that may be appropriate in some cases. These plans can also operate in conjunction with an ESOP.

"Employee ownership eliminates the conflict of interest between managers and employees. Everyone's incentives are aligned, so everyone works together to make the company as successful as possible.

Based on an NCEO analysis of 1,232 leveraged ESOP transactions at three large banks, 1.3% of ESOP companies in the sample defaulted on their loans in a way that imposed losses on their creditors for loans in effect between 2009 and 2013 (or an annual rate of 0.2%).

The Power of Dividends

What Is the ESOP Committee?

Users of this site often ask us what steps they should take to get educated about making a decision about an employee ownership plan. This article outlines the basic steps we recommend.