Employee Stock Ownership Plan (ESOP) Valuation and Uses

In an Employee stock ownership plan (ESOP), a trust fund is set up by the company, into which it contributes new shares of its own stock or cash to buy existing shares. This is how the ESOP can borrow money and buy new or existing shares, with the company making cash contributions to the plan to enable it to repay the loan. Irrespective of how the plan obtains stock, company contributions to the trust are tax-deductible, under definite confines.

Buying shares from passing owner: Privately held companies owners can use an ESOP to create an equipped market for their shares. Wherein the company is liable for making tax-deductible cash contributions to the ESOP to buy out an owner's shares, or with the use of an ESOP can borrow cash and buy the shares.

Borrowing cash at a lower after-tax cost: ESOPs are different when we talk of benefit plans and their ability to borrow money. The ESOP borrows cash to buy company shares or shares of current owners. As a whole, The Company then makes tax-deductible contributions to the ESOP to repay the loan, with deductible principal and interest rates.

Creating additional employee benefit: Any company can easily issue new or treasury shares to an ESOP, deducting their value (for up to 25% of covered pay) from taxable income. Or can contribute cash, buying shares from standing public and private company owners. In public companies, it accounts for about 5% of the plans and about 40% of the plan participants, ESOPs play conjunction with employee savings plans and therefore, rather than matching employee savings with cash, the company matches them with stock from an ESOP, and at a higher level.

It’s always suggested that Private companies must have an annual outside valuation to determine the price of their shares. You must start off with a right approach to make fair you, your company and existing employees in shares and profit. Take help of a recognized consultancy like Foxboro consulting group before getting involved in legalities and terms of tricky call in Employee stock ownership plan (ESOP) valuation or Business Combination Valuations. Visit http://www.foxboro-consulting.com/ for more details. 

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