An ESOP is a unique corporate finance tool that allows business owners to gain liquidity, often at a tax-advantaged basis, while passing along ownership to the company’s employees.
In an ESOP, the sponsoring company provides their employees with stock ownership through annual contributions on behalf of the employees. Shares are allocated to employees’ accounts annually and are held in an ESOP trust until the employee vests in the plan and retires or leaves the company. Typically, the shares are then sold.
An ESOP is a qualified retirement plan. It’s regulated by the Internal Revenue Service and the Department of Labor and came into being with the passage of the Employee Retirement Income Security Act (ERISA) in the 1970s. The regulation is meant to ensure that the ESOP is used for the benefit of employees and that it’s not just a tool where a business owner can sell at an inflated price.
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