Business owners often see their company as a one-way ticket into their golden years, making many entrepreneurs overlook their own retirement. However, even if you head a successful corporation, you should always have a well-considered exit strategy. An Employee Stock Ownership Plan (ESOP), is a little-known route to retirement that allows business owners to sell company stock to their employees. Creating an ESOP

Understanding an ESOP

An ESOP is technically a retirement plan. When a business owner establishes an ESOP, they establish a trust or other entity controlled by their company. The owner can then sell the corporation’s own stock to employees while retaining the right to control and run the business.

While the business owner continues to hold the reins, the employees benefit from their stock—an investment workers can use for their own retirement.

Deciding if an ESOP Is Right for You

You might benefit from an ESOP if:

  • You want to retain control of your company. While an ESOP sells corporate shares to employees and permits them voting rights, you will still be able to direct company affairs, retain your existing managerial structure, and preserve your business’s board of directors.
  • Your company is profitable. You need to establish a trust to create an ESOP. If your company is not profitable, the managing trustee’s fiduciary duty might prevent them from purchasing stock.
  • You want your employees to have a voice. As a general rule, any non-union worker over the age of 21 will be allowed to participate in an ESOP. 

The Advantages of an ESOP

ESOPs provide business owners and employees with several significant advantages:

  • An ESOP is a tax-exempt trust and could allow the business owner to bypass expensive capital gains taxes.
  • Contributions of stock and cash are tax deductible.
  • When ESOPs borrow money to fund stock sales and acquisitions, loan repayments and interest can be tax deductible.

Who Can Establish an ESOP?

Most corporations that have stock options can establish an ESOP. This includes S corporations and C corporations. However, LLCs cannot have an ESOP because LLCs cannot issue shares of stock.

If you are not sure whether your business qualifies for an ESOP, contact an experienced California estate planning attorney to discuss your options.

Establishing an ESOP

Small and large businesses alike can benefit from an ESOP. But establishing an ESOP is not simple. Your company will have to found and fund a special trust. This trust will own the company’s stock and reallocate shares to participating employees’ ESOP accounts.

If the company cannot provide the trust with enough funding to begin purchasing stocks for reallocation, you might have to take a loan.

Contact Us Today

ESOPs can provide an excellent path to retirement for the owners of profitable and well-managed businesses. However, ESOPs are not ideal for every business owner. They can be difficult to establish, manage, and terminate. If you are considering an ESOP, you should speak to an experienced California estate planning attorney.

The Law Firm of Kavesh, Minor & Otis, Inc. has decades of experience helping California business owners, investors, and entrepreneurs plan their retirements and their lasting legacies. Our dedicated team of attorneys could help determine whether you are eligible to start an ESOP, assist in establishing the necessary trust, and ensure that your accounts stay current and compliant with state and federal law.

Starting an ESOP and fulfilling your retirement goals is easier when you have a seasoned professional by your side. Send the Law Firm of Kavesh, Minor & Otis, Inc. a message online, or call us at 1-800-756-5596 to schedule your initial consultation.


Philip J. Kavesh
Nationally recognized attorney helping clients with customized estate planning guidance for over 40 years.
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