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Guide: Exit Your Business | Strategy Four

Employee Stock Ownership Plan

Iowa Employee stock ownership plans (ESOP) are a useful tool that allows departing owners to share the business equity with existing employees. ESOPs are commonly used to create a market for the shares of departing owners of successful companies and to reward the employees of the company.

To set up an ESOP, a company will create a trust fund, into which either new shares of its own stock or cash to buy existing stock will be contributed and stored. Any contributions made to this fund are tax-deductible, which makes this plan attractive to many companies.

Once the company accumulates new shares, or uses its cash contributions to buy back existing shares, the shares are allocated to individual employee accounts. The allocations are commonly made on the basis of relative pay, although other nondiscriminatory methods can be used as well. The employees will gain an increasing right to the shares in their account as long as they continue to work at the company, also known as vesting.

When employees leave the company, they receive however much stock they have vested. These shares must be bought back by the company at their fair market value. These shares give employees the right to vote on all issues within public companies, and the major issues within private companies.

Frequently Asked Questions

Do you have questions about exiting your business? You should consider checking out our Resource Navigator. It houses the contact information of 400 of our most helpful partners from across the state who provide free to low-cost assistance to Iowa entrepreneurs and small business owners.

Q: What is an Employee Stock Ownership Plan?

A: An ESOP is a way for an exiting business owner to share their equity of the business with new and existing employees.

Q: Is an ESOP for every company?

A: No, it depends on the company and the type of employees it attracts. For example, a full-time college graduate may have a different set of values or commitment to a company compared to a high school sophomore.

Q: Are there any similar options to an ESOP?

A: Worker Co-Ops might be the most similar to an ESOP.

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NOTICE: The information included on this website is to be used only as a guide. It is not intended to cover all provisions of the law or every taxpayer's specific circumstances.

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