Building Chicago - 2015 - (Page 25)
What ESOP Can Do For You
retirement age over the next 10 years,
succession planning is understandably
a priority for many of them. One approach to succession
planning that has received quite a bit of attention for some
time is the ESOP. But do these arrangements fit the distinctive
aspects and challenges of a construction business? It's a
question worth asking.
Considering the concept
An ESOP is a type of employee benefit plan, similar in many
ways to a profit-sharing plan. To set up an ESOP, a company
establishes a trust fund and contributes either new shares of
its own stock or money to buy existing shares. The shares in the
trust are then allocated to individual employee accounts, based
on compensation, and the employees become vested in the
accounts over a specified period of service years.
One reason for companies to establish an ESOP is to buy the
shares of an owner who wants to retire. A closely held or familyowned business may find there isn't a family or staff member who's
capable of or interested in taking over when the founder is ready
to leave. In such cases, the company can make tax-deductible
contributions to an ESOP to buy the owner's shares or have the
ESOP borrow money to buy shares. Either way, the company enjoys
tax advantages while helping to deal with the succession issue.
A retiring owner also can cash out over time, keeping a seat on the
ESOP trustee board and, thus, retaining voting rights in management
decisions during the transition. In this manner, businesses with an
ESOP are often better able to keep valuable and experienced staff on
board through management changes. In addition, an ESOP can serve
to even further motivate staff to contribute toward the company's
success - because they're part owners.
Reaping tax advantages
The tax advantages of ESOPs are considerable. All
contributions to the plan are tax-deductible, including shares
of stock, cash contributions (whether they're used to buy stock
or to build up a cash reserve) and any payments made to repay
loans taken out by the ESOP.
In addition, in C corporations, sellers are eligible for a tax
deferral. The seller can reinvest sales proceeds in other securities
and defer taxes on the gains as long as thirty percent of the
company stock is owned by the ESOP immediately after the sale
and the seller meets other certain criteria.
In S corporations, the income allocated to the ESOP is taxexempt at the federal and usually at the state level as well.
When an ESOP holds thirty percent of an S corporation's stock,
thirty percent of profits are tax-exempt. When the ESOP holds
all of the S corporation's stock, there's no income tax owned on
any of the company's profits.
Last, ESOPs are allowed to borrow. When the plan does so
to buy new or existing shares, the company can then make taxdeductible contributions to the ESOP in repayment. In such a
case, both principal and interest are deductible.
Assessing the downsides
ESOPs incur considerable startup and maintenance costs
that can run into tens of thousands of dollars, even for small
businesses. Midsize to larger companies may face even higher
expenses based on the complexity of the arrangement.
The amount of money needed to buy back shares of
departing employees at an independently established fair
market value can be substantial.
The company or ESOP must maintain enough liquid assets
to repurchase the shares of employees who leave. If the stock
price appreciates substantially, doing so can be a tall order
for contractors, who commonly face cash-flow dilemmas
associated with the unpredictable nature of construction
projects and backlog.
An ESOP can also substantially affect your bonding
capacity. (See the side bar "ESOPs and surety bonds"). Be sure
to consider these risks with your surety representative well
before creating an ESOP.
Discussing the implications
Make no mistake - establishing an ESOP is a major
undertaking for any company. Be sure to discuss the implications
beforehand with your financial advisor, legal counsel, and, as
mentioned, bonding provider.
ESOPs and surety bonds
Contractors - particularly those that bid on public
projects - rely on their ability to secure surety bonds, which
guarantee to a project owner that the company will perform
its work in compliance with the contract terms. As you know,
surety brokers evaluate your company carefully before
issuing bonds to ensure you're well managed, generally able
to meet your obligations, and preferably profitable.
On the plus side, a well-designed ESOP can show that
a contractor has a continuity plan in place and cares about
retaining key employees. By reducing the company's
corporate income tax burden, an ESOP may also boost
cash flow and net worth, which can help substantially with
On the down side, should you need to borrow money
to meet the ESOP's financial obligations, that loan will be
recorded as a liability on your balance sheet. In turn, your net
worth will be negatively affected, and your bonding capacity
quite possibly will be impacted.
For more information, contact Glenn Bylina, CPA
(MPS|CPA) at (708) 349-6999 or visit our website at
A Publication of the Builders Association | 25
ith many contractors' employees reaching
Table of Contents for the Digital Edition of Building Chicago - 2015
Message from the Executive Director
Message from the 2016 Chairman
Message from the 2015 Chairman
Meet the Builders Association Board of Directors
Titles and Liability: The Latest on IL Mechanics Lien Act
Tackling Today’s Talent Challenges
Construction Leadership Council (CLC) of the Builders Association
Quality Educational Experiences
Will Chicago Contractors Celebrate a Sweet ’16?
We Built Chicago
Government Relations Activities
2015 Golf Outing
Spring Summit & Safety Awards
Safety Stand Down 2015
Proposed Amendments to the Fair Labor Standards Act
Trends in Collective Bargaining Agreements
What ESOP Can Do For You
Become a Member
Builders Association 2015 Leadership
Related Industry Organizations
Labor Contract Expirations
Index to Advertisers
Building Chicago - 2015