22 ESOP Misconceptions and Myths Part II

by admin on August 23, 2012

Myth #12: The custodians of an ESOP have got a greater level of fiduciary responsibility than do custodians of other kinds of worker benefit programs Incorrect. In fact, the custodians of an ESOP have got a lesser risk of fiduciary responsibility because of the character of an ESOP. In ERISA an ESOP, in contrast to other worker benefit programs, is exempt from any condition that the assets of the program be diverse or that the assets of the program make a good rate of return. Therefore, to this level, the custodians have got lesser fiduciary responsibility compared to they would have in a profit sharing or 401(k) program.

Myth #13: Having an ESOP will end up in needing to share fiscal reports with all the workers Incorrect. Nothing in the law mandates that fiscal reports be shared with program members. The only fiscal disclosure which is needed is the condition that every member is provided at least yearly with a benefit statement which demonstrates the quantity of shares allotted to her or his account, and the reasonable market price of those stocks.

Myth #14: An ESOP should cover all workers of the organization Incorrect. Generally, an employee stock ownership plan should cover all of the nonunion workers who have reached age 21 and who have finished one year of service. But, in case the organization has many departments, the ESOP can be made to cover just the workers of a specific department, given that the program doesn’t discriminate in favor of highly-compensated workers. Likewise, in case the organization has many subsidiaries, the program may be made to cover just the workers of one or more subsidiaries, given that the program doesn’t discriminate in favor of highly-compensated workers.

Myth #15: An ESOP generates a “repurchase liability” which can endanger the continued existence of the company Incorrect. An ESOP doesn’t generate any greater repurchase liability compared to repurchase liability which already exists to present investors. All share is eventually a call on capital which ends up in a repurchase debt when the existing investors retire and cash out their shareholdings. Having an ESOP, this debt is far more controllable than would otherwise be. This is due to 2 reasons. Firstly, in the case of an ESOP, the share is repurchased having tax-deductible bucks instead of with after-tax bucks. Therefore, an ESOP actually decreases the cash expense instead of enhancing it. Secondly, in the case of an ESOP, the repurchase debt is distributed across the lives of all the members instead of concentrated in the hands of some big investors. As a consequence, in the case of an ESOP, the cash expense is much more even as well as predictable.

Myth #16: An ESOP is expensive to apply and also to manage Incorrect. The expense of applying an ESOP usually varies from $30,000 to $50,000, incorporating the expense of the original assessment. In contrast to selling a company to a 3rd party, in which accounting, legal and brokerage charges usually vary from $300,000 or more, the expense of applying an employee stock ownership plan is one-tenth of the charges incurred in selling the company to a 3rd party. Yearly charges for administering the program as well as for upgrading the share assessment usually run around $10,000 annually, however this is a tax deductible expenditure which can be paid for either by the organization or by the program.

Myth #17: An ESOP should always buy shares of organization share which are already remaining Incorrect. An ESOP can buy newly-issued stocks or treasury stocks. In the option, the organization can just contribute newly-issued stocks or treasury stocks in place of making cash contributions which are after that used to buy newly-issued stocks of organization share. The organization will get a tax-deduction for the reasonable market price of the shares contributed.

Myth #18: My workers wouldn’t be capable to save or contribute sufficient money to buy me out An ESOP purchase isn’t funded (except in unusual circumstances) with worker contributions or salary reductions. Instead, an ESOP purchase is funded exactly as any other 3rd party purchase or share redemption is funded C with money lent from a bank, with seller note funding, or a mix of the 2. There is one difference, nevertheless, in the scenario of an ESOP purchase. In the scenario of an ESOP purchase, the principal sum of the liability is paid back with tax-deductible bucks, while in the scenario of all other kinds of buyouts the principal part of the debt should be paid back with after-tax bucks.

Myth #19: My workers wouldn’t be capable to borrow sufficient funds to buy me out Just like in the scenario of other kinds of 3rd party buyouts, the workers don’t borrow the funds individually. Instead, the money is lent by the organization itself and repaid out of future earnings of the organization.

Myth #20: As an ESOP originally doesn’t have assets; an ESOP won’t be able to borrow over a fixed sum of money The ESOP is generally not the direct lender. In most instances, the organization itself borrows the bucks and after that loans exactly the same sum of money to the employee stock ownership plan. The organization loan is after that paid back from tax-deductible contributions which the organization makes to the ESOP. The organization after that uses the ESOP’s loan installments to repay the bank loan.

Myth #21: An ESOP should be 100% invested in stocks of organization share Incorrect. An ESOP require just be a mainly invested during shares of organization share during the life of the program. It means that during the life of the program, as much as 49% of the program might be invested in some other investments. Therefore, an ESOP will typically have 2 accounts a C Corporation Share Account as well as Other Investments Account. All of investments except organization share will be added to the Other Investments Account.

Myth #22: An ESOP should buy share from investors on a disproportionate structure for the sellers to have capital gains treatment Incorrect. In the scenario of privately-held companies, a pro rata redemption of share from current investors will end up in typical income taxation to the selling investors. This outcome can just be prevented in case the quantity of shares which are redeemed is a disproportionate compared to the quantity of shares still kept by the remaining investors. This requirement, nevertheless, only pertains to share redemptions. Share which is bought by an ESOP remains as remaining share in the hands of the ESOP custodian. Consequently, the laws relating to share redemptions don’t apply to share which is bought by an ESOP.

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