For the employees, an ESOP is an employee benefit plan. For the business owner, an ESOP is a tax advantaged way to sell a business.
- Establish an ESOP trust. The company sets up an ESOP trust - a legal entity that holds shares of stock on behalf of the employees. While similar in structure to a 401(k) plan, the trust primarily holds stock in the company.
- Fund the ESOP trust. The company or the ESOP borrows money (the "ESOP Loan") to facilitate the stock purchase.
- ESOP trust buys stock. The ESOP trust acquires some or all of the shares from the selling shareholders for Fair Market Value.
- ESOP repays loan. The ESOP Trust uses pre-tax contributions or tax-exempt distributions from the company to repay the ESOP loan.
- Stock is allocated to employees. The trust allocates shares of stock to individual employee accounts based on a pre-determined formula determined by the company.
- ESOP trust holds stock for employees. The ESOP Trustee buys, holds and sells the shares of stock for the benefit of the employees.
- Employees receive retirement benefit. As employees leave the company, they receive their ESOP benefits.