What is an ESOP and How does ESOP work.
                     What is an ESOP and 
How does ESOP work?
What Is an Employee Stock Ownership Plan(ESOP)?
• Employee Stock Ownership Plans (ESOPs) are also known as Employee Share Ownership Plans. 
• An ESOP business model provide a company’s workforce with an ownership interest in the 
company. 
Source: sesesop.com
Stock Ownership
• ESOPs allow companies to provide their employees 
with stock ownership, often at no up-front cost to the 
employees. 
• Employee Stock Ownership Plan shares, however, are 
part of employees’ remuneration for work performed.
Source: sesesop.com
How do ESOPs work?
• ESOP shares are allocated to employees and may be 
held in an ESOP trust until the employee retires or 
leaves the company. The shares are then sold. 
• ESOP plans are regulated by Employee Retirement 
Income Security Act (ERISA), a federal law that sets 
minimum standards for investment plans in private 
industry.
Source: sesesop.com
How does an ESOP work for employees?
• An ESOP opens when a company sets up a trust and 
makes tax-deductible contributions to it. 
• Some employers look at years of service, while others 
look at annual compensation.
• ESOPs must not discriminate in their operations in 
favor of highly compensated employees, officers or 
owners.
Source: sesesop.com
How does an ESOP work for business owners?
• ESOP trustees are typically upper management in the 
company. 
• An ESOP can be used to finance ownership transition, 
raise new equity capital, refinance outstanding debt 
or acquire productive assets.
• ESOPs can also be used to increase cash flow by 
making plan contributions in stock instead of cash.
Source: sesesop.com
How does an ESOP work for stockholders?
• With an employee stock ownership plan in place, a 
majority or controlling shareholder has an exit 
strategy when he or she is ready to retire. 
• Likewise, an ESOP is often an attractive buyer for a 
minority shareholder in a closely held company. 
Source: sesesop.com
Uses for ESOPs
• To buy the shares of a departing owner: Owners of 
privately held companies can use an ESOP to create a 
ready market for their shares.
• To borrow money at a lower after-tax cost: ESOPs are 
unique among benefit plans in their ability to borrow 
money. 
• To create an additional employee benefit
Source: www.nceo.org
Major Tax Benefits
• Contributions of stock are tax-deductible: That means 
companies can get a current cash flow advantage by 
issuing new shares or treasury shares to the ESOP.
• Cash contributions are deductible: A company can 
contribute cash on a discretionary basis year-to-year 
and take a tax deduction for it.
Source: www.nceo.org/
Major Tax Benefits Cont.
• Contributions used to repay a loan the ESOP takes out 
to buy company shares are tax-deductible.
• Sellers in a C corporation can get a tax deferral.
• Employees pay no tax on the contributions to the 
ESOP, only the distribution of their accounts, and then 
at potentially favorable rates.
Source: www.nceo.org
Challenges
• Employee stock ownership plans have complex rules 
and need significant oversight.
• In case a company doesn’t have the staff to do the 
ESOP work properly, they could risk issues and 
potential violations.
• For companies requiring significant additional capital 
for carrying on business operations, they must avoid 
ESOPs.
Source: www.nceo.org