Is an Employee Stock Option Plan right for your company?
Employee stock option plans (ESOP) are gaining popularity as a way for owners to transition their businesses. Companies with an ESOP can sell the business to their employees to transition from current ownership. It also allows owners to share equity with employees and provides a retirement plan for those employees.
Are there any incentives?
Iowa incentivizes the creation of an employee stock option plan to retain businesses. Iowa is unique in offering this incentive with the other close state offering this being Colorado and the incentive is limited to $3,000. The Iowa Economic Development Authority (IEDA) helps Iowa business owners complete the first step of setting up an ESOP - a feasibility study conducted by an independent financial professional.
- Reimburses 50% (not to exceed $25,000) of the cost incurred to obtain a feasibility study (the only other close state offering this is Colorado and it’s only for $3k);
- Reimbursement is dispersed in two stages: half is released upon the conclusion of the feasibility study and the remaining half after the successful formation of the ESOP, and;
- Iowa also offers a 50% reduction from state income taxes for the net gain from the sale of stock to an ESOP.
7 Reasons to Consider an ESOP
If you are unsure if an ESOP is right for your company, consider these seven benefits.
- Easier to attract and retain labor because employees can save for retirement without taking it from their paycheck.
- Employees tend to think more like owners, instilling a sense of accountability for business success.
- Cash liquidity, which is particularly helpful when being acquisition-minded, puts ESOP companies in a prime position to make acquisitions in the current environment.
- Any gains in the value of the ESOP are tax-deferred.
- When established, a trust is set up that invests primarily in company stock and holds its assets for the benefit of employees.
- The business owner gains liquidity by selling up to 100% of the company’s stock to the trust.
- While shares of company stock are sold to the trust, the sale does not transfer control of the company to the ESOP participants; rather, control of the company remains with the company’s management.
Do companies actually do this?
The National Center for Employee Ownership (NCEO) reports that the most common structure for broad-based employee ownership in the U.S. is the ESOP.
- Approximately 6,600 U.S. companies have an ESOP;
- Approximately 14 million U.S. workers are ESOP participants;
- The mid-west U.S. is home to the greatest number of ESOPs, and;
- In Iowa, there are approximately 160 ESOPs with over 455,000 participants.
Need help setting up an ESOP at your company? Reach out to our advisors for assistance.