EMPLOYEE STOCK OWNERSHIP PLANS (ESOP) AND STOCK BONUS PLANS

These plans allow corporations to contribute company stock to the plan or allow stockholders to sell their stock to the plan. If a stockholder sells at least 30% of his or her stock to the plan, the proceeds can be rolled over to qualified domestic securities (stocks and bonds) tax free.

The stock is allocated to participants prorata based on each participant's compensation to total plan compensation. The stock is cashed out or distributed to terminated participants just like in a Profit Sharing or 401(k) Plan. If the company is privately held, an independent licensed appraisal expert is hired to value the stock each year. The more profitable the company, the more the stock is worth.

The major difference between an ESOP and Stock Bonus is an ESOP can borrow money. For example, if a business owner(s) want to sell the company to the employees through the plan, the owner(s) can have the corporation borrow money on behalf of the plan. This cashes the owner(s) out immediately. The corporation makes cash contributions to the plan, which in turn pays off the note. When a corporation borrows money through an ESOP both the principal and interest are tax deductible.

There are many ways to utilize this kind of plan. A common misconception is that once you have an ESOP or Stock Bonus Plan the employees vote the stock and thus can tell management what to do. You only have to pass through voting rights if you plan to merge, acquire or sell the company. In all other instances the Trustee votes the shares. Additionally, you don't have to sell or transfer all the stock to the plan. Many corporations are only owned 5% to 25% by the ESOP. There are very few 100% ESOP owned companies.

These plans are intended to make employees part owner. The theory is that once an employee recognizes that their work effects the bottom line, which impacts salaries and pension or profit sharing/401(k) contributions, they become more productive. We don't know if ESOPs make successful companies or successful companies have ESOPs. Although this theory has not yet been proved, the premise sounds good, and hopefully employees would rather own stock in the company they work for than invest in some other company they have no ties to.