If you are a businessperson seeking to minimize or reduce current taxes, or seeking to create retirement wealth, you should definitely consider qualified plans, ESOPs or both to achieve your financial goals.

The primary benefit of a ESOP is that it allows business owners to be bought out on a tax-free basis, or at least at a very low tax basis. Another benefit is that by giving employees an ownership interest, motivation and dedication to the success of the company is greatly increased. Finally, if handled correctly, an ESOP can be an ideal vehicle for turning tax liability into working capital.

Very basically, an ESOP is a trust into which the company makes annual tax-deductible contributions. Contributions can be as cash or stock. The contributions are allocated to individual employee accounts in the trust.

If contributions are made as stock, the valuation of that stock must meet IRS valuation guidelines. The beauty of this approach, however, is that privately or publicly held stock can be used to offset a tax liability, creating instant working capital for growth or improving cash flow.

If contributions are made as cash, the ESOP can eventually be used to purchase stock from the owner/shareholder with no tax on the sale of the stock as long as the individual uses the cash proceeds to invest in stocks or bonds. This becomes a vehicle for transferring cash tax-free directly to the owner in exchange for shares, and doing so with dollars partly provided by tax deductions!

The operation and tax requirements of these plans are complicated, requiring experts in IRS tax code and business valuation procedures. At SAMG, we have some of the most experience individuals in the bay area to help you achieve your business planning goals. 

For more information on this, review our services or request our free brochure "An Introduction to ESOPs."