Advantages and Disadvantages of
Employee Stock Ownership Plans

Advantages of ESOP


The corporation receives a deduction for its contributions to the
ESOP that are used to pay principal and interest on the loan.  
For a non-leveraged ESOP, the corporation receives a
deduction for contributions to the ESOP.  Certain financial
organizations lending to the ESOP can exclude from income
50% of the interest received on the loan.  However, the
availability of the partial interest exclusion is limited to
situations in which the ESOP owns, immediately after the sale.
The corporation receives a deduction for the dividends paid on
employer securities used to repay the ESOP loan or paid to
participants.  A seller of nonpublic employer securities to the
ESOP is not taxed on gain realized on the sale to the ESOP if
specific rules are met.  These rules include, among others, a
requirement that the ESOP must own 30% of the corporation's
stock after the sale, and the seller must purchase "qualified
replacement property."  This technique allows the gains from a
sale to an ESOP to be rolled over into publicly held securities.  
Such gain is untaxed until such securities are sold. The
corporation receives a tax deduction for the fair market value
of employer securities contributed to the ESOP.


A leveraged ESOP may help in divesting a subsidiary or
division. A leveraged ESOP may be used as an anti-takeover
device. A leveraged ESOP may be used to make a tender offer
to all shareholders. A leveraged ESOP may be used to facilitate
a leveraged buyout. Noncallable preferred stock may be used in
an ESOP if it is convertible at any time into common stock
which has dividend and voting rights equal to or in excess of
any other common stock of the corporation. An ESOP may help
create a market for employer securities. An ESOP may help a
corporation obtain equity capital for general corporate
purposes, such as business expansion. An ESOP can borrow or
acquire stock from related parties, such as major shareholders.
An ESOP may provide an important source of compensation
and retirement benefits for employees to participate in the
future growth, earnings and dividends of the employer.
Through proper structuring and communication, an employer
may be able to reduce the costs of other benefit programs by
implementing the ESOP.

Issues or disadvantages of ESOPs

There are numerous special rules applicable to ESOPs under
the Code and ERISA, including detailed and complex loan
rules. Pass-through of voting rights is required for ESOP
participants under specific circumstances. An initial
independent appraisal of non-publicly traded securities is
required and annual independent appraisals are required
thereafter. The reporting and disclosure rules of ERISA apply
to ESOPs. Employee direction of investment of accounts for
older employees is required generally starting when a
participant attains age 55 and has 10 years of participation in
the ESOP. Distributions are required to be made in employer
securities and put options are required for distributions of
nonpublic securities.  Terminated employees may hold stock
and cause problems. The sale to an ESOP of closely-held
employer securities may be recharacterized as a constructive
dividend. Creation of an ESOP may result in loss of control of a
company by the controlling shareholder. Employee-shareholders
acquire rights to information regarding the corporation, which
may present a problem for closely-held businesses.
The Department of Labor has begun to closely scrutinize ESOP
transactions, especially with respect to the price paid by the
ESOP for the stock it acquires. Future legislation can change
rules and limit benefits. An ESOP must be established and
maintained for the exclusive benefit of its participants and
US 626-572-6990