Rick Kozlowski

Rick Kozlowski

(802) 864-5756



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An "employee stock ownership plan" (an "ESOP") is a type of trust that is a creature of federal law -- designed to hold shares of a company for the benefit of the company’s employees.  It is also a special kind of employee benefit plan, subject to the benefits and restrictions of ERISA.  An ESOP is a complicated animal, but in the right situation can provide you with a great method for transitioning your company, benefitting your employees, and realizing the business’ value.  

How Does an ESOP Work?

There are two main ways to fund an ESOP.  First, the owner can contribute shares to the ESOP (or cash to buy shares) in a tax advantaged manner.  Second, the ESOP can borrow money to purchase the owner’s shares -- again, in a tax-advantaged manner. 

It is this second funding mechanism that you can use to create a market for the purchase of your company.  Simply put, you sell the business to the ESOP which borrows the money to fuel the purchase.  The tax advantages include the ability to defer/eliminate capital gains from the sale, and the company’s ability to deduct contributions (loans payments) to the ESOP. 

The employees are the beneficiaries of the ESOP -- they acquire interests in the ESOP based on longevity and compensation (much like older defined benefit pension plans).  When an employee is vested and then leaves the company (or retires), the employee is entitled to payment for the value of his or her ESOP interest.  It is a great way to involve the employees in the success of the company, and give them incentives towards that success.

In the right circumstances, an ESOP can provide a perfect market for the sale of your business.

What are the Downsides?

There are two major downsides.  ESOPS are complicated to arrange and administer.  The initial cost of establishing an ESOP can range from $20,000 to $50,000.  Annually, the company must be valued, and certain regulatory filings are required -- not an insignificant cost each year (although tax deductible).  In addition to cost, ESOPS are subject to the rules under ERISA, which are complicated and require diligence in order to ensure compliance.  These factors often make an ESOP the wrong choice for your transition plan.

Recent Trends

Despite all of the benefits, there are roughly only 11-12,000 ESOPS currently in existence.  On average, less than a thousand are formed, nationwide, during a given year.  ESOPS are, therefore, somewhat rare, which indicates that they are not for everyone.

If you think an ESOP might be the right fit for you, or want to discuss other types of transition plans, please contact me by accessing the information at the left.


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