Business Owners who wish to:
·Infuse working capital into the company by ruducing tax liability
·Provide capital for family members who have taken over the business
·Acquire another company with pretax dollars
·Go public
·Induce employees to remain with the company
·Create private market for company stock
·Increase employee productivity and thereby increase company profitability
·Improve the effectiveness and reduce the cost of employee benefits including pension and profit-sharing plans
·Sell or merge the company to employes or select management team
·Sell or merge the company to family members
·Sell or merge the company to outside third party
·Put in place a controlled exit strategy from the company
·Eliminate corporate taxes and increase cash flow
·Cash out one or more shareholders and avoid capital gains tax
·Recover taxes paid in prior years
·Refinance existing debt, making both principal and interest tax deductible
What should I look out for when choosing a Third-Party Administrator (TPA)?
A good TPA will:
·Collaborate with your ESOP consulting firm to review your options and assist in building a plan that meets your needs
·Constantly monitor Internal Revenue Service and Dept. of Labor Regulations to determine their options for and effect on existing and newly created plans
·Analyze employee census information to determine eligibility for each plan year
·Conduct Department of Labor and/or Internal Revenue Service audits of your plan from their office trustees, investment advisors, and attorneys involved with the plan.
How Can an ESOP be an Exit Strategy ?
An ESOP allows owners of closely held companies to sell to an ESOP for the full fair market value. The government subsidizes the sale by allowing the company to become tax-exempt thus the dollars that previously went to pay taxes may be used to fund the purchase.
How Can an ESOP Finance Growth?
An ESOP can make your company tax exempt. At the 40% tax rate, this equals a 66% increase in cash flow which can be used to buy other companies, buy new equipment, or any other corporate purpose. As long as the money is left in the company to fund growth, you never pay any taxes on it or on the earnings resulting from the growth.
How Can I Use ESOP to Motivate Employees?
There is considerable research linking ESOPs to substantially improved corporate performance. The company becomes a major portion of the employee’s retirement plan and everyone has a stake in it. Improved corporate performance benefits everyone, not just the owner.
How Can I Use ESOP to Attract Quality Employees?
Many companies use ESOPs as another benefit they can offer in a competitive labor market. Companies with a 401(k) use the ESOP as one more lure. Generation-X’ers don’t work for just a paycheck; they want an equity stake in something they are helping to build.
Can I use an ESOP to make my L.L.C. Tax Exempt?
In the last several years, there has been a steady increase of businesses forming as, or converting to, an L.L.C. structure. While this structure is called a corporation, its legal structure is closer to that of a partnership. Since there is no issuance of stock in an L.L.C., you cannot directly install an ESOP in an L.L.C.
Since S-Corp's and the L.L.C. are taxed identically, the advantage lies with the S-Corp and it's ability to be tax-exempt through utilization of an ESOP. The L.L.C. provides more personal liability protection to ownership compared to the standard S-Corporation. However, an S-Corp ESOP provides liability protection at least equal to and possibly greater than the L.L.C.
An S-Corporation can be a member of an L.L.C. Since an L.L.C. is a flow-through tax entity, the tax burden on the income of the L.L.C. (K-1) passes through to the S-Corporation. The S-Corporation is taxed on those proceeds based on the tax rate of its' shareholder. In the event the S-Corporation's shareholder is the tax-exempt ESOP, then all proceeds received from the L.L.C. are also tax-exempt.
It is clear that there are many potential benefits involved from converting or combining tax-exempt S-Corporations and L.L.C.'s.
However, it is impossible to detail in this article all the potential uses or methods of utilizing this unique combination. Please contact ABRC to explore specific applications.
When is a company considered too small for an ESOP?
Government guidelines state that a company must have more than 10 employees to qualify for an ESOP.
Can large companies avail themselves of the tax advantages of an ESOP?
Absolutely. Some of the largest publicly traded corporate ESOP association members in the country include:
· Amsted Industries
· Anheuser-Busch Companies
· Bell South Corporation
· Brookshire Brothers
· DynCorp
· Ferrell Companies
· Home Depot
· Honeywell
· JELD-WEN
· Lifetouch, Inc.
· Lowe's Companies
· Merrill Lynch
· National Health Care
· Parsons Corporation
· Proctor and Gamble Co.
· Ruddick Corporation
· SAIC
· United Airlines
· W.L. Gore Associates
…and the list is growing day by day!
What is a SESOP?
A SESOP is the ESOP for S-Corporations. The combination of the S-Corporation and an ESOP (SESOP) has been possible since January 1, 1998. This combination of entities creates the opportunity for extremely favorable income tax planning. An S-Corporation is not taxed as a corporation. Instead, it is taxed by "passing through" taxable income to its shareholders. An ESOP is a tax-exempt trust designed to invest in the stock of the sponsor. If an ESOP owns stock of an S-Corporation, the income attributable to that stock is tax-exempt. If the ESOP owns 100% of the S-Corporation's stock, 100% of that corporation's profits are tax-exempt.
Why is Congress supporting ESOPs if it means companies do not have to pay taxes?
Congress encourages ESOPs as a method of strengthening the free private enterprise system and small business growth while simultaneously providing retirement programs for the baby boomers and future generations.
About ABRC
What differentiates A.B.R.C. from other ESOP providers?
A.B.R.C.’s approach to ESOPs is unique. A.B.R.C. helps companies install Employee Stock Ownership Plans as a corporate financial strategy for growth or family succession, and not merely an employee benefit program.
Our clients tell us we are different because:
· Our average ESOP installation timeframe is 4-6 weeks, not 12-18 months.
· We charge a fixed fee for our services so you know exactly what to budget for and there are no surprises.
· We provide turnkey ESOP design and installation. Instead of dealing with numerous accountants and lawyers, you only have to deal with an ABRC project manager.
· In addition to design and installation, we offer ESOP maintenance services. This means we remain accountable to you and work to ensure your ESOP remains government-compliant through the life of your ESOP.
· We provide holistic design and installation, we think through every angle, every possible scenario.
· We have implemented the largest number of SESOPs for a firm our size.
Does A.B.R.C. have case studies specific to my industry?
Yes, just ask! Send an email to abrc@abrc-esop.com specifying your type of industry, and we will send you examples of companies in your industry that have successfully used ESOPs.
Does A.B.R.C. offer ESOP Maintenance Services?
Yes, we absolutely stand behind our work by offering ESOP Maintenance Services. For a low, flat fee, ABRC will ensure you stay compliant with ESOP tax laws and maintain your tax-exempt status year after year.
Will A.B.R.C. provide maintenance services to an ESOP that another provider, perhaps even a competitor, designed and installed?
Not every ESOP provider is willing or able to provide maintenance or plan administration. A.B.R.C. is different in this regard. A.B.R.C.'s maintenance clients include those for whom we did the original ESOP installation as well as clients of other ESOP providers in need of post-installation maintenance and support.
