Tax-Advantaged Exit Strategies: Employee Stock Ownership Plans

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Employee Stock Ownership Plans (ESOPs) can be a fantastic tax-advantaged tool for selling your business or for transferring a family company to younger generations while avoiding gift and inheritance taxes.

ESOPs are a kind of tax-qualified retirement savings plan whereby employees may make cash contributions to the company or have funds deducted from their paychecks to buy shares of company stock. Currently, about 10 million employees in the U.S. are enrolled in ESOPs. A company contributes to the ESOP with shares of stock or tax-deductable cash contributions.

Once established, the ESOP may leverage its assets to borrow money that can be used to buyout an owner’s remaining stake in the company. You may choose to sell all of your stock, or hold some and sell it over time for better tax consequences. The company’s repayment of funds borrowed for the acquisition of your shares may be structured as tax-deductible payments to the ESOP.

In addition to providing a mechanism for your exit strategy that is tax advantaged for both you and the company, making your employees part-owners of the business gives them a vested interest in your company’s future, potentially improving the quality of their work and driving better company performance. Further, recruiting your employees as owners can save you the time and expense of hiring a business broker to sell you company.

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