Employee Stock Ownership Plans vs. Stock Options

Employee Stock Ownership Plans vs. Stock Options

Let’s find out which of the two might be right for your company.
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Employee stock ownership plans (ESOPs)
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Employee stock ownership plans (ESOPs) provide a way for employees to own stock in the company without requiring them to actually purchase shares in it. This option is practiced among closely held companies, and is a common way for an owner who is retiring to transfer the ownership of the company to their employees.
ESOPs are, in essence, trust funds created by employers for their employees. Employers who set up ESOPs variously contribute funds to buy shares, borrow money to buy shares and repay the money through contributions to the trust, or simply donate shares.
Advantages of the ESOP
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Crucially, employees receive their shares from the ESOP when they leave the company. They have the option of hanging onto the shares, selling them back to the company, or selling them on the market.
One of the most important advantages of the ESOP is that it offers a way to gradually transition ownership. Some employers use them as a way to raise money in the short term without a rapid change in ownership which could compromise the brand.
ESOPs can be very good for employees, offering considerable opportunity and boosting morale within the organization to boot.
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Disadvantages of the ESOP
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While there are many benefits of the ESOP, there are drawbacks as well. For one thing, outside investors may lose interest in funding the company. There are also ongoing administrative costs, and the regulations can be considerable.  
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Employee stock purchase plan (ESPP)
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Another way in which to promote employee stock ownership is the employee stock purchase plan (ESPP). Instead of the employer buying or donating shares for the employee, the employee buys stock in the employer’s company with their after-tax wages. The key draw for the employee is usually that the stock is available at a discounted price.  
What can the employee benefit?
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ESPPs are most common in companies that are publicly held, because private companies are typically subject to additional regulatory burdens from the U.S. Securities and Exchange Commission (SEC) if they offer an ESPP.
Employees can benefit tremendously from an ESPP if everything goes well: after all, an ESPP offers employees a way to buy stocks from their employer at below-market rates. ESPPs also encourage employee investment and an entirely reality-based sense of ownership in the company, which can reduce turnover.  
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Comparasion between ESOPs and ESPPs
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Compared with ESOPs, ESPPs have quite different tax ramifications. An employee’s ESOP is tax-deferred until retirement, and there are tax deductions for business owners. ESPPs, on the other hand, are financed with after-tax wages, and employees who sell their shares are required to pay capital gains taxes.
 
Both ESOPs and ESPPs have considerable advantages, and each represent trade-offs in other ways. Which of the two is the preferable option for any given company will depend on numerous factors. Fortunately, both are excellent ways to promote employee stock ownership.
 
 

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