June 2011 Creating An Employee Stock Ownership Plan
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Creating An Employee Stock Ownership Plan

By Steve Strauss. ARCHIVE:

One trait I have noticed, shared by the great, most successful small businesses, is that they often give employees a stake in the business; an ownership share. Rather than it being just another place to work and draw a salary, a small business that an employee partially owns makes that employee a committed entrepreneur. As a result, they usually are more motivated, more dedicated, and more conscientious.

So it is a smart idea to consider if you want to keep the best people on staff.

For employers and employees alike, the most popular employer-sponsored retirement plan is the 401(k) since contributions are tax deductible for employers and tax deferred for employees. Although participation is optional, employees today know they need to fund their own retirement and usually appreciate the opportunity to do so.

Investments made by the 401(k) contributions can be made by employees or by the plan administrator; know however that with a 401(k), the more options you give your employees, the more expensive administration will be. Expect administration costs to be at least $1,000 a year as reports must be filed with the IRS, the Department of Labor, plan participants, and so forth.

The question that you the small business owner must answer is whether you can afford to match funds contributed by employees. It is expensive to match employee contributions dollar for dollar, even if the dollars are tax deductible.

Either way, to set up a 401(k) plan, or some other tax-deferred retirement plan, you need to speak with a financial planner or your accountant.

There are also three types of stock ownership plans that you could implement:

1. Stock Options: Here, your business would award the option to buy company stock at a specified price, and the employee then has a certain amount of time to exercise the option and become a part owner of the company. Approximately 10 million employees in business both public and private hold stock options at any one time.

2. Employee Stock Ownership Plans (ESOP): These are a sort of retirement plan akin to a 401(k), although in this case, instead of creating a diversified portfolio, with an ESOP, the retirement funds are invested in the stock of the employer. Under this scenario, the company contributes cash to buy its own stock (usually from the owner) which is then shared among the employees. There are significant tax benefits available under this plan. It is estimated that about 8 million employees invest in ESOPs.

3. Employee Stock Purchase Plans (ESPP): These allow employees to buy stock at a discount (usually around 15%.) The employee can then either sell the stock for a profit, or simply hold onto it.

While it is true that you will be giving up part of your equity to create some sort of an employee stock ownership plan, the benefit is that in the process you will be creating a more motivated workforce. For more information on creating some sort of employee stock ownership plan, contact the National Center for Employee Ownership at www.NCEO.org.