Investing Blog

Employee Owned Companies ESOPs by Jordan at Investing Blog

To learn more about the relationship between martial arts and personal finance please read The Martial Artist's Guide to Investing.

Subscribe to our RSS feed to stay up to date or follow us on Twitter or Facebook.

I’ve been seeing a number of companies tout their employee-owned status on their products, so I figured why not make it a blog post? We’ll run through the basics of ESOPs, and employee-owned companies.

Why Companies offer ESOPs

The idea behind an ESOP is simple. Should you have a vested interest in the company as a whole, you’re more likely to work harder, stay at the company longer, and feel that your compensation is equal to the value you bring to the company.

ESOPs can be great for boosting morale, too. How often have you felt that only a few employees or owners take home all the money? With an ESOP, you can be both an employee and an owner, and in some cases, it won’t cost you anything out of pocket to claim your ownership stake. One other fringe benefit that has been proven by a number of studies is that those who have access to an employee stock ownership plan generally have more cash at retirement. Pretty cool, huh?

Employee Stock Ownership Plans

Also known as ESOPs, these plans allow employees to receive ownership of a company or purchase ownership in their employer in a way that creates the smallest possible tax burden.

When an ESOP is at the ground floor, the company sets up a trust that will make tax-deductible contributions toward purchasing more of the company’s stock. Generally, full-time employees with history at the company (usually a year or more) will be brought into the trust, and share a portion of the pool.

The ESOP can also collect and pool dividends, allowing for near tax free growth. Those who choose to sell can continue rolling over profits if they roll over the investment into new products within 30 days. This kind of flexibility, and no age requirements, are why employees tend to favor ESOPs over pensions and other programs.

Only when a distribution is made is a tax burden created. However, those who begin to draw on the ESOP can choose to move disbursements immediately into another savings plan, say, an IRA, and avoid any transitional taxes.

The Inner Workings of Employee Stock Ownership Plans

Accumulation of a company’s stock within an ESOP can be done in a number of ways. A common solution in which employee’s become vested over time, usually in under 6 years. When an employee leaves or retires, their share is cashed out by other investors or the ESOP at current market value.

Much like a corporation, an ESOP operates internally. Employees earn votes based on their share accumulation and elect a board of directors that takes charge of important policy decisions like ESOP debt issuance, new purchases, cashout policies, etc.

Use It If You’ve Got It!

Truly, a company that allows its employees to own their employer is a company that is truly interested in employee success. If you have the opportunity to buy into an ESOP, or vest into one over time, be sure to take part.

One important thing to remember, however, is that you still need diversification. Planning on working at and retiring from the same employer is the quickest way to lose it all should your employer go belly up. Don’t put all your eggs in one basket, and don’t plan to eat eggs from only one basket.

About Jordan

Jordan is the web master of www.investingblog.org, a site dedicated to skillful investing, news and recent trends. You can read the original article here.

Return to the Investing Blog section

Read The Martial Artist's Guide to Investing

Return to the Martial Arts Insight Home Page