5 Benefits of an Employee Stock Ownership Plan (ESOP) When Your Family Does Not Want to Take Over the Stone Fab Business
You’ve developed a great business that has provided for you and your family. While you’ve accomplished something special, often, family members have other ambitions or ways they want to make a difference in the world.
More than likely, you have key employees that have contributed to your success because we are never in business alone. Their dedication and work product have resulted in an incredible company you’d like to share with them. Setting up an employee stock ownership plan (ESOP) benefits you and them tremendously.
Here, we talk about the five main benefits of an Employee Stock Ownership Plan for your stone fabricator business.
1. It Creates a Succession Plan
A succession plan is essential for numerous reasons, with the three most important being accommodating your retirement goals, reducing tax liabilities, and ensuring the continuance of what you’ve built.
Your succession plan should be contemplated, put together early, and adjusted based on business and key employee performance and your goals. You might decide that much of the company and its management will go to valuable employees. Still, a percentage is retained for yourself and your family to ensure ongoing revenues from what you have built.
Your financial advisor, experienced in succession planning, is an outstanding source to discuss your goals, desires, and tax implications.
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2. Provides Liquidity
If the succession plan involves an eventual buyout of your share, that liquidity could carry you throughout your retirement and help family members achieve their dreams.
Another form of liquidity is if the deal is structured such that you or your family receive regular distributions based on the percentage of ownership and net revenues. Those distributions may be outlined in the agreements or left to subsequent corporate governance to decide.
3. Tax Benefits
As previously mentioned, a succession plan has tax implications. The equation includes your business structure, gift taxes, the tax obligations of those working to earn ownership, and the taxation of the business entity itself.
The business might have been formed as a sole proprietorship, partnership, LLC, S corporation, or C corporation, which will form the basis for the start of the succession plan.
Very likely, you will transfer stock to key employees under an ESOP, making an S corp or C corp the only type of entity that works for stock transference unless you wish to rewrite the operating agreement of a partnership annually. If transference of shares over time is the method of succession, your adviser will steer you toward an S corp to avoid double taxation so long as the number of shareholders is under 100.
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4. Motivates Employees
A bonus or profit sharing is nice; the chance to own part of the company one works for diligently is 1,000 times better. When employees have an opportunity to assume and grow ownership in a company gradually, they feel an even greater call to perform as considerable stakeholders.
Increased performance due to ownership only makes the company operate with greater efficiency.
5. Increases Company Value
When a plan is in place, tax issues are anticipated, and key employees are growing their ownership in the business, the value of a company increases tremendously. Employees wishing to establish themselves as owners will take ownership, increasing bottom-line revenues, and work to be exceptional leaders. They know their performance has lasting rewards.
With the increase in company value and revenues, your potential liquidity substantially increases.
An ESOP has Tremendous Value
Your key employees are essential to your success, and giving them a chance to take ownership of your stone fabrication company pays dividends. Tell them your intentions, spell out the terms to continue increasing their share ownership, and plan the succession with your financial advisor or trusted resource.
If your family members wish to make positive change in the world in their own ways, planning for your succession now and creating an ESOP may be an option. Consult your accountant and financial planner to determine if it’s right for your situation.
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