Pennsylvania-based investment firm Coho Partners, Ltd. was seeking the most constructive means possible to provide its workforce with company ownership and to gain enough tax efficiency to provide the partners with liquidity. Ultimately, Coho Partners decided its best bet was an employee stock ownership plan or an ESOP.
In the case of Coho Partners, its shareholders sold 20 percent of its outstanding shares to the ESOP, while the firm itself refinanced its existing debt to a new credit facility in line with the ESOP transaction. It also received a formal ESOP valuation estimate, plan structuring, and legal services from an ESOP consulting firm, ensuring the process was executed smoothly. After officially establishing its ESOP and S Corporation status in October 2021, Coho Partners reached its goals and felt the decision provided significant advantages for the firm’s partners and employees.
Many reasons a company like Coho Partners seeks to introduce an ESOP for its employees. From a company perspective, ESOPs are known as a lucrative means to increase your brand value, while they can also make for a practical leadership approach.
Eager to fast-track our business goals and reap the many tax advantages that come with introducing employee stock ownership, the former reason is precisely why Ergode aligned with the ESOP trend this past January. Overall, ESOP has been an effective way of rewarding the hard work of our team on all levels of operation and reinforcing one of our brand’s seven core values: team ownership.
ESOPs can be a huge asset to any firm, so I want to focus on some of their many benefits in this blog post.
How ESOPs Can Accelerate The Pace of Achieving Your Goals
ESOPs are intended to align the interest and motivations of both employees and shareholders. Putting everyone on the same page is a great way to maintain business organization, motivating employees to focus on company performance as a whole.
In addition, selling to an ESOP can bring a firm more economic value through significant benefits which aren’t often seen after selling to a third party, like transactional flexibility. ESOP transactions enable owners to carry out the sale of parts, or all, of a business, while a shareholder can also participate in the administration of an ESOP. This is yet another way ESOPs allow businesses to maintain the interest of both shareholders and employees, given transactional outcomes ultimately affect the entire firm!
ESOPs can also bring numerous tax advantages to a firm, which we’ll talk about more in-depth shortly. But these advantages are crucial for incentivizing company owners to work more closely with employees in areas such as business planning and strategy.
Tax Advantages of ESOP
In terms of running a business, an ESOP company can increase cash flow, and, in turn, raise its overall value. And in the same vein, the tax advantages of ESOPs can be a huge perk for both shareholders and for a firm itself.
First, some basics: ESOP-owned S Corporations are exempt from federal and state income taxation. Since they’re a pass-through company, their corporate income is passed onto shareholders.
The most significant tax advantage of ESOP is that contributions of stock are tax-deductible, along with cash contributions. Companies can contribute cash on discretionary terms and take a deduction, whether using the contribution to buy shares from current owners or to accumulate a reserve for future usage.
Another tax advantage of ESOP is that employees pay zero tax on their ESOP contributions — only the distribution of their accounts. That means they can roll over their retirement plan distributions, or pay the current tax on the distribution, accumulating gains over time taxed later as capital gains.
How ESOP Attracts Venture Capitalists
Ownership is a critical feature in drawing the attention of private investors, and the unique structure of ESOP signals that your company values proprietorship from the top-down.
An ESOP tells private investors that your company understands the important role played by employees in helping shareholders carry out their vision. It also suggests that you have top-notch leadership and organization, seeing as ESOPs align the interests of employees with shareholders and higher-ups.
How Venture Capitalist Funding Boosts Firm’s Capacity
Venture capitalist funding can boost a firm’s capacity by giving those with smaller-scale operations access to tools that help with a number of business operations, including financial management and resource management. They can also pick out investment opportunities deemed worthwhile for a company, and will provide assistance in terms of working with those opportunities.
Conclusion
While the tax advantages and increased sales are just a few of the many benefits an ESOP can bring to the table, it can also generate more sales, higher employee compensation, and major growth within your company. Plus, introducing an ESOP is a great approach to earning the attention of venture capitalists, who can help grow your company through smart investments and resource management.
If you want your firm’s employees to reap the benefits of large-scale company performance while also increasing your brand’s value from a company perspective, follow our lead at Ergode and introduce an ESOP!
Cloverbites By Rupesh Sanghavi 
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