Trucking company owners can use Employee Stock Ownership Plans (ESOPs) as part of their succession planning strategy. As a tax-advantaged alternative to third-party sales, a sale to an ESOP should be considered by trucking company owners assessing their succession planning options.
ESOP Sale Alternative
Having key managers and employees take over operations when the owners retire is appealing. However, since many of these key employees have limited capital to fund a management buyout, using an ESOP as part of this buyout structure can make the transaction possible.
An ESOP can borrow funds to acquire company stock, thereby financing a buyout in a more tax-efficient manner, since the ESOP compensation expenses recorded for employees allows for repayment of loans with pre-tax dollars.
Benefits of Sale to an ESOP
Federal tax code contains provisions that favor the sale of company stock to an ESOP. Shareholders who sell to an ESOP can defer capital gains tax payments on their proceeds, when following the guidelines set forth under Section 1042 of the Internal Revenue Code.
Additional tax advantages for companies exist, most notably for Sub-S corporations. The Sub-S corporation ESOP is not taxable on its share of corporate earnings. The taxes are deferred until employees take distribution from the plan upon retirement, death, disability or termination.
An ESOP can lead to the development of an employee-ownership culture, one that empowers and rewards employees for their efforts, by demonstrating the financial benefits of ownership and sharing company performance data in a way that emphasizes how each work group contributes to success.
Considering the ESOP Option
Trucking company owners invest decades of effort to build the value in their businesses. A liquidity event will eventually occur to provide for their retirement and estate planning needs. When trucking company owners are considering their succession plan options, an ESOP should be among the opportunities they consider. The ESOP opportunity could offer the “win-win” alternative for both owners and their employees.