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Time to cash out? ESOP's an option.

Article Excerpt
AN EMPLOYEE STOCK OWNERSHIP Plan or ESOP is among the most important financial tools available to business owners. Whether used to buy the shares of a departing shareholder/owner, to borrow money at a lower after-tax cost or to create an additional employee benefit, an ESOP is a solution that owners and operators of service centers may wish to explore.

An ESOP can be established and funded in a variety of ways. For one, the business can borrow funds that are loaned to the ESOE The ESOP uses the funds to buy out the selling owner. All contributions to the ESOP are deductible, which means the business is buying out the owner using pre-tax dollars. Following the purchase, the business makes annual tax-deductible contributions to the ESOP, which the ESOP uses to pay down the debt.

ESOPs are most commonly used to provide a market for the shares of departing owners of successful, closely-held metal centers, to motivate and reward employees or to take advantage of incentives to borrow money for acquiring new assets using pretax dollars. Remember, however, that ESOPs are in every case a contribution to the employee, not an employee purchase.

With an ESOP, the service center establishes a trust fund, into which it contributes new shares of its own stock or cash to buy existing shares. As an...

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