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ESOPs...is it time to look?

Jan 04 2017
Our main clients are closely held businesses (and their owners), so business and individual planning are often tied at the hip in our office.  Often that means a business sale isn't the ideal exit or retirement solution for our clients, so we look hard for tax advantaged strategies that (at a minimum) won't hurt the underlying business operations and ESOPs have been a regular part of that analysis.

ESOPs  are employee stock ownership plans and they have some commonly stated benefits, including:

1. Capital gains tax deferral (IRC Section 1042); *this is the one that gets all the press

2. Tax free income to the ESOP from an S-corp.;

3. Employee motivation and retention; and **this is the one that is often of more interest to our clients

4. Succession planning.

ESOPs have been bounced around in our offices for a long time, but we seem to be finding more situations that fit than in the past. I think that is because in the past, most of our clients were looking at a leveraged ESOP as a tax free exit (#1 above) and often the underlying economics didn't work (see here), but recently we have had some clients looking at ESOPs for other reasons and the results seem to be more favorable.

There are, of course, a lot of factors to to look at before anyone pulls the trigger on an ESOP, but it looks like we may be seeing more of them in our future and they are definitely something to consider in the right situation.




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Joshua Watkins

Mr. Watkins is the Managing Member at Watkins Law Firm, LLC.  His legal practice has primarily focused on working with private companies as general counsel. As general counsel his duties typically include an array of tasks such as: in-house day-to-day activities, advising the company’s board of directors on their oversight responsibilities, planning and preparing complex corporate transactions, commercial litigation, tax planning, oversight of the corporation’s compliance with federal and state regulations, legal budget management, and specialized outsourcing of legal matters to other counsel when appropriate.

When counsel to emerging start-up companies, Josh often brings critical expertise in the many types of capital formation activities, including entity and structure choices, fundraising processes, and securities compliance.

Website: watkinslawfirm.com/index.php/attorneys/joshua-m-watkins
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