Why Create An ESOP?The Issue: An important issue that owners of closely held businesses face when attempting to diversify their personal wealth or to achieve management succession to either family member(s) or to an existing management group is that these people often do not have the funds to purchase the business outright from the owner. The problem is that obvious solutions, such as “funding” the transition by redeeming the owner’s shares or bonusing money to the family or management group, result in “stacked” levels of federal and state taxation, which may end up costing the business on average up to $3 in revenue for every $1 received by the owner, net of tax. This multiple taxation can create significant cash flow issues for the company and the business owner.
The Answer: One option for the business owner is to use the tax benefits of an ESOP to ease the ownership transition. Through the ESOP, company revenue can flow through to the business owner without taxation. By resolving this issue, company cash flow available to fund a stock buy-out can be dramatically improved. This scenario allows the business owner to diversify his wealth and provide a smooth transition of management succession with untaxed corporate earnings.
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