FREQUENTLY ASKED QUESTIONS
ABOUT AN ESOP

Q: Do the employees own the company stock?
A: No. The stock is owned by the ESOP trust and is in the name of the trust. The employees only have beneficial interest.  

Q: Do employees vote the stock held by the trust?
A: No. The Company's Board of Directors appoints a Committee which instructs the Trustee on how to vote the stock. Management control is not lost with an ESOP. 

Q: Do the employees receive financial information on the company?
A: No. They only receive a statement at the end of the plan year of the total in their account and their vesting and a summary of Form 5500.  

Q: What is the value of the business?
A: This is determined by professional appraisals along the lines set by the Internal Revenue Service (IRS).  

Q: Is it possible to sell stock to an ESOP and pay no federal or state taxes?
A: Yes. Shareholders in a closely held company can sell their stock to the Company's ESOP and pay no taxes. There are certain regulations pertaining to this sale so a professional ESOP practitioner should be consulted. 

Q: How does the ESOP increase the Company's cash flow?
A: Monies that would have gone to pay taxes, are invested in the company by the ESOP purchasing Company Stock.  

Q: Is it possible to convert a profit-sharing plan to an ESOP?
A: Yes. Such a conversion avoids a company having two employee benefit plans.

Q: Can a company have an ESOP and 401(k) plan?
A: Yes. The 401(k) plan and the ESOP can be combined to be one plan or can be separate.  

Q: What is the cost to install an ESOP?
A: The Plan and Trust cost is in line with the cost of a profit-sharing plan or 401(k) Plan. However, there is an additional cost for private closely held companies for company valuations.  

Q: Will the employees try to influence, or direct the Company's operations?
A: No. Experience has shown that there is no negative response on the part of employees. Research has shown that when presented correctly, the ESOP creates additional productivity.  

Q: Is there an opportunity for estate planning?
A: Yes. There is a current Bill in Congress that would allow a dollar-for-dollar inheritance tax credit for donation of stock to the trust.  

Q: Is the ESOP a plan that creates a "market" for shareholders?
A: Yes, and often with no taxes paid on the sale.  

Q: If an owner sells his stock, does he relinquish his company control?
A: No. Even with a 100% ownership by the ESOP, the owner can still control and operate the company.  

Q: Does the ESOP negate other company stock benefits and incentives?
A: No. The Company can still continue with their stock Plans, i.e., stock options, stock purchase, etc.


Return To SCS Management Home Page
  For more information please call (858) 587-1300 or e-mail us at scsmanagement@sbcglobal.net