In recent years, the company’s product lineup has expanded. “We, both the employees and the owners, did not want to stop this arc of growth. The ESOP has given the company the means and the structure to continue growing into the future, while also allowing John and Marsha Moore to realize the fruits of their many years of hard work and sweat equity put into this tiny but mighty company.”
With an ESOP, owners of a business can slowly transition out of daily operations, sell all at once, or remain with the company in some capacity, ensuring succession and the preservation of their legacy. It also provides stability, to both the company and its employees, who have helped build the business.
As an incentive
Although Carol Jenkins Barnett, daughter of Publix founder George Jenkins, says her father never thought of selling Publix or going public, his vision was for all associates to have a stake, as they were on the front lines. He believed employees, like himself, should be active participants in the company, every day.
Legacy and control were important issues for the owner of Triple T Transport. “Rather than sell to a strategic partner, a similar business to ours, or a competitor, the owner wanted to do something for employees. He wanted to retain his legacy,” notes Amelung. “With an ESOP, you can retain some control over the business and maintain a relationship in the business you’re proud of.”
Cash flow, debt & tax considerations
Employee stock plans can also facilitate company cash flow, raise capital, and finance debt. Contributions to an ESOP are tax deductible, up to 25 percent of total company payroll. Dividends paid to ESOP participants by C corporations are also tax deductible, with no limits. In addition, the cost of raising capital is lower, since an ESOP can purchase newly issued common stock in pre-tax dollars.
An ESOP’s unique ability to borrow money either from the company or on the company’s credit offers not only a tax advantage but enables debt financing at low cost. Company stock is used as collateral and the proceeds going into the corporation can be used for a variety of business purposes.
The company pays back the loan with pre-tax dollars to the ESOP, which, in turn, pays the lender. Both principal and interest are tax deductible to the company and interest payments are excluded from its contribution limit.
There are differences in how the Internal Revenue code applies to C and S corporations; the latter, S corporations, do not enjoy all of the tax advantages available to C corporations. However, S corporations owned by an ESOP pay no income tax on earnings attributable to ESOP shares.
