Unusual Business Organization: The Employee-Owned Company
Long ago, before tax agencies would often muddy the waters, business owners sometimes saw reliable employees who had worked several decades at the same company end up destitute after they had to retire due to age or health concerns. One option that was often used was that the business owner would set aside a certain amount of stock in the company to be presented to the loyal employee upon retirement, providing them with the means to support themselves in their golden years. Today, that structure has been adapted to modern tax agencies and retirement funds to form an employee-owned company. But how do they work? Here's a quick look at this somewhat unusual business structure.
Though more commonly referred to as an employee-owned business, an employee stock ownership plan company or ESOP company provide personal ownership in the business by employees in a variety of ways. In some plans, the employee has the option to purchase the company stock. In others, it's provided as a bonus, profit-sharing option or stock option. There are a wide range of tax benefits for businesses that are set up under ESOP options. In the US currently, there are just short of 7,000 businesses operated as employee-owned companies, providing employment to an estimated 14.4 million people.
In legal terms, an ESOP is considered a type of employee benefit plan, similar to profit sharing. The company's purchase of stock to provide to employees is tax deductible to up to 30% of EBITDA, changing to 30% of EBIT in 2022. However, companies that are 100% ESOP and S-corporations that do not pay taxes will not be impacted by this deduction. When the employee leaves the company, they are entitled to take their stock with them, or the company is required to buy it back at fair market value for privately-owned companies.
If you've considered starting or working for an employee-owned business, you're not alone, but many individuals don't quite know where to take that idea in terms of business plans, financing and the legality of setting up the entire system. Fortunately, AccountRely has many experienced business professionals available on a consultation basis who would be happy to help you research the related issues and get your ESOP business off the ground. Please feel free to reach out today to get started