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Employee Stock Ownership Plan

Key Features

  • Contributions may be made in stock
  • May be used to buy out owners of a business

An Employee Stock Ownership Plan, or "ESOP," is a stock bonus plan that is a type of profit sharing arrangement under which the employer makes contributions in stock rather than in cash. Under an ESOP, the employer makes cash contributions which are then used to purchase company stock. Many large publicly-held companies have found tremendous benefit from an ESOP. It tends to get the employees aware of and makes them a contributing part of the profit of the company. It provides additional markets for company stock, and the participants shareholders rights are protected by laws.

ESOPs have been popular for leveraged buyouts when a company is sold to its employees. In that case the ESOP borrows enough funds from a lender to complete the purchase of the stock, and the company becomes employee-owned. The ESOP repays the lender from profits of the company which are distributed as dividends, and from cash contributions which are made to the ESOP.

This type of plan is appropriate for a company which is publicly held and for which employee ownership is appropriate. It tends to benefit employees based upon the performance of the company.

 
 
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