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What is an employee-owned company?

On Behalf of | Mar 30, 2021 | Business Law

When it comes to your business structure, your decisions depend on the size of your company, the product or service you sell, the types of employees you have and many other factors.

Sometimes, you may require a less common structure, such as an employee-owned company, also known as an employee stock ownership plan (ESOP).

How does an employee-owned company work?

In an ESOP agreement, employees participate in a stock purchase program. To participate in the program, most businesses require the employee to work for a certain number of years. Employers fund the ESOP through cash or company stock.

Why should a company consider an employee-owned company?

When it comes to employee-owned companies, there are several tax benefits. Any contribution that you use to repay a loan is tax-deductible and so are cash contributions and stock contributions.

If you have an S corporation, then the percentage of company shares that are owned by the ESOP will not have to pay federal income tax. For example, if the ESOP owns 60% of the shares, then the government only taxes 40% of the profits.

Employees who participate in the fund can use the ESOP for retirement. For example, when an employee prepares to retire, the agreement allows him or her to take his or her share of the ESOP and receive the funds. The employee may choose to receive one lump sum or to receive payments over time. Then, the employee sells the stock back to your company. An employee can also sell his or her stock upon leaving the company.

An employee-owned structure can benefit the company itself but also the employees. If you want to learn more about an ESOP, and whether it could be right for your company, it can be worth discussing your situation with legal counsel.