Employee Stock Ownership Plans
What makes ESOP Retirement Plans Different?
The unique features that make an ESOP different and therefore able to become an acquiror of a privately-held business are as follows:
- An ESOP is permitted to take on debt financing.
- An ESOP is designed to primarily own private company stock.
As a result, ESOPs can borrow money to acquire privately-held company stock from business owners, making an ESOP a tax-qualified business-owner tool for liquidity and succession planning.
ESOPs were invented in 1956 in San Francisco, CA by an economist and attorney named Louis Kelso. Kelso created the first ESOP as a means to transition ownership of Peninsula Newspapers, Inc. from its two founders to the company’s management team and employees. Since then, ESOPs have been a popular tool for business-owners of U.S. private companies to sell their stock in a tax-advantaged transaction that results in the management and employees of the business receiving the benefit of ownership at absolutely no cost to them and in lieu of nothing.
ESOP Structure Overview
The participating employees of an ESOP-owned company are “beneficial-owners” of the stock owned by the ESOP, or simply “employee-owners.” The ESOP trust owns company shares on behalf of the employee-owners, and a trustee of the trust manages the shares for the exclusive benefit of the ESOP participants.
ESOPs recognize that employees are usually the greatest asset of a company. Participation in the ESOP seeks to reward the employees and management through stock ownership in the company for which they work. It enables current and future employees to share in the future success of the company.
ESOP Adoption Statistics
There are approximately 7,000 ESOP-owned companies in the U.S. that cover nearly 14 million employee-owners, representing more than 10% of the private company workforce in America. Multiple studies conducted by the National Center for Employee Ownership and The ESOP Association have shown that ESOP companies tend to outperform themselves, as well as their peers, after becoming ESOP-owned. They are more resilient in economic downturns, and less likely to lay off workers. ESOPs combat wage inequality and accomplish their primary objective of providing significant retirement savings to millions of Americans.