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These plans allow corporations to contribute company stock
to the plan or allow stockholders to sell their stock to the
plan. If a stockholder sells at least 30% of his or her stock
to the plan, the proceeds can be rolled over to qualified
domestic securities (stocks and bonds) tax free.
The stock is allocated to participants prorata based on each
participant's compensation to total plan compensation. The
stock is cashed out or distributed to terminated participants
just like in a Profit Sharing or 401(k) Plan. If the company
is privately held an independent licensed appraisal expert
is hired to value the stock each year. The more profitable
the company, the more the stock is worth.
The major difference between an ESOP and Stock Bonus is an
ESOP can borrow money. For example, if a business owner(s)
want to sell the company to the employees through the plan,
the owner(s) can have the corporation borrow money on behalf
of the plan. This cashes the owner(s) out immediately. The
corporation makes cash contributions to the plan, which in
turn pays off the note. When a corporation borrows money through
an ESOP both the principal and interest are tax deductible.
There are many ways to utilize this kind of plan. A common
misconception is that once you have an ESOP or Stock Bonus
Plan the employees vote the stock and thus can tell management
what to do. You only have to pass through voting rights if
you plan to merge, acquire or sell the company. In all other
instances the Trustee votes the shares. Additionally, you
don't have to sell or transfer all the stock to the plan.
Many corporations are only owned 5% to 25% by the ESOP. There
are very few 100% ESOP owned companies.
These plans are intended to make employees
part owner. Once an employee recognizes that their work effects
the bottom line which impacts salaries and pension or profit
sharing/401(k) contributions they become more productive.
Although this result has never been proved. We don't know
if ESOPs make successful companies or successful companies
have ESOPs. But the premise sounds good, and hopefully employees
would rather own its own company stock than invest in some
other company they have no ties to.
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