“ESOP” is an acronym that stands for Employee Stock Ownership Plan. Technically, the Plan is operated or administered pursuant to a tax-exempt Trust; accordingly, the Plan is alternatively referred to as the ESOP.

The purpose of an ESOP is to enable employees to acquire beneficial ownership in their Company without having to invest their own money.

The Plan is also a tax-exempt entity for Federal and state corporate income tax purposes. This enables the Company to make cash and/or Company stock contributions to the Trust, which is used to acquire stock of the Company on behalf of its employees. The advantage of the ESOP is that employees are able to acquire this stock without paying a current income tax on the stock. Again; this results from the fact that the contribution is made entirely by the Company and is not taxed to employees personally as it is allocated. The advantage to the Company is that the ESOP makes pre-tax dollars available to finance Company growth and/or to create ownership liquidity at the time of retirement.

Because employees are not taxed currently on the stock which is acquired for their benefit, they are able to acquire up to twice the amount of stock which they could acquire if a Trust arrangement were not used. That is, if shares of stock were issued to an employee by the Company, that employee would be taxed currently on the value of those shares. Also, if an employee buys stock directly from the Company or other shareholders, that employee is using “after-tax” funds rather than pre-tax dollars. The use of a Trust eliminates this tax problem since the Trust is not taxable and frees employees from income tax liability until the shares are distributed.

The following advantages are material to the adoption of the Plan.

The ESOP will enable the Company to buy out the current owners, using tax-deductible Company contributions.

The ESOP will enable the employees to share in the current and future economic rewards of ownership.

An ESOP will be a better incentive plan for employees than other alternatives.

The flexibility of the ESOP to not only invests in the stock of its own Company but to diversify its investments over a broad range of opportunities makes it a valuable retirement asset.

 Create Better Incentives and Urge Better Employee Productivity.

The third goal of Employee Stock Ownership Plans is to encourage and reward increased employee productivity and efficiency. Increased employee productivity and efficiency is one of the largest variables in the overall profitability of any company. In many instances, a 5% or 10% increase in individual employee productivity may result in increasing company profitability by 50% or more. The goal of the ESOP is to reward employees for their efforts so that they automatically share in the growth of the company. The ESOP creates a direct link between employee productivity and employee benefits.

Gerald McDonald