Following the guidelines of Course ID guidelinesStudent’s NameUniversity
Abstract
This particular essay paper has been written to represent the Employee Stock Ownership Plan (ESOP) and its effectiveness. Significantly Employee Stock Ownership Plan (ESOP) has its definite purpose for the employees such as multi-taskers who want to strengthen the financial position of their own as well as their organization simultaneously. Employee Stock Ownership Plan (ESOP) is a process that has been described in this paper clearly to understand the definition of it. At the same time the rules and regulations of Employee Stock Ownership Plan (ESOP) has been narrated. Eventually thorough descriptive discussion has been made to find out the uses of ESOP and the major effectiveness of it. Also the limitations of ESOP have been presented to understand every aspect of Employee Stock Ownership Plan (ESOP).
Introduction
Employee Stock Ownership Plan (ESOP) is mainly considered as a liquidity tool as by these procedure employees of an organization can have the ability to boost their company’s financial situation while giving out the assets with the organization’s owner. Meanwhile Employee Stock Ownership Plan (ESOP) is a very interesting feature for an employee that can merge the tax reimbursements of a capable retirement plan with finance related to a corporate sector and align retirement benefits of an employee directly with goals of the firm. Employee Stock Ownership Plan (ESOP) can be implemented in a number of ways. Employees can be eligible for direct stock buying; can take delivery of stocks option, can be given stocks as bonus, or acquire stocks of the organization through an earnings distribution plan. Basically Employee Stock Ownership Plan (ESOP) has a number of rules and regulations though. Organizations and employees can use the plan very effectively to motivate employees and provide rewards of market shares.
Employee Stock Ownership Plan’s (ESOP) Rules and Regulations
Like other employees benefit plans Employee Stock Ownership Plan (ESOP) is very similar to profit sharing tactics. In an Employee Stock Ownership Plan (ESOP) an organization needs to set up a trust fund in which new shares of the organization’s own stocks or cash have been contributed to purchase the existing market shares. In the plan organization contributes cash money to repay the loan for settlement of assets (Hams, 2012). One of the main notable rules of Employee Stock Ownership Plan (ESOP) is that the plan is tax beneficiary irrelevant to how the process of stock acquisition and repayment have been made which is an advantage for the employees. Secondly, the shares of the employees in the trust fund to be paid to individual accounts of each employee. Employee Stock Ownership Plan (ESOP) can alternatively borrow cash to purchase existing or new shares. Stock allocation has been done on basis of payment made to the employees and by seniority employees can accumulate shares to their own accounts. Finally if the employees leave the organization they have the right to receive the stocks and the corporation must buy back the shares in a fair value from the employees.
Uses of Employee Stock Ownership Plan (ESOP)
There are three main uses of Employee Stock Ownership Plan (ESOP) that have been described here.
Major Tax advantage of Employee Stock Ownership Plan (ESOP)
Employee Stock Ownership Plan’s (ESOP) most important tax benefits have been presented below:
In the Employee Stock Ownership Plan (ESOP), ESOP can borrow cash to purchase the existing shares or treasury shares or new shares issues by the company. Irrelevant of the use of cash borrowed the payment made is tax deductable.
Dividends paid to the shareholders or employees to repay the Employee Stock Ownership Plan (ESOP) loan amount or the amount that has been reinvested to the company stocks can be considered as tax deductable.
Limitations of Employee Stock Ownership Plan (ESOP)
With a lot of benefits to show, Employee Stock Ownership Plan (ESOP) has a number of caveats. There is specific law to be followed in Employee Stock Ownership Plan (ESOP). As a result as per the law Employee Stock Ownership Plan (ESOP) cannot be allowed in partnership businesses and professional corporations. It can be only permitted in S organizations. For private sector companies the rules are strict as the organization is bound to purchase the share of the employees who has left the company. The setting up cost of Employee Stock Ownership Plan (ESOP) is also substantial as $40,000 requires starting the Employee Stock Ownership Plan (ESOP) in case of small organization.
Conclusion
Finally for S organization there is a number of benefits in Employee Stock Ownership Plan (ESOP) as discussed above. The plan helps to save tax and strengthen the financial position significantly. Both the company and the employees are certainly benefited for the plan. Eventually it can be stated that Employee Stock Ownership Plan (ESOP) is a nice financial tool for any S organization to expand its business and control tax at the same time. Undoubtedly it works significantly for a number of purposes to make cash money rotating significantly within an organization reducing payable tax amount.
References
Hams, B. (2012). Ownership thinking. New York: McGraw-Hill.
Kramer, B. (2010). Employee ownership and participation effects on outcomes in firms majority employee-owned through employee stock ownership plans in the US1. Economic And Industrial Democracy, 31(4), 449-476. doi:10.1177/0143831x10365574
PENDLETON, A. (2006). Incentives, Monitoring, and Employee Stock Ownership Plans: New Evidence and Interpretations. Industrial Relations, 45(4), 753-777. doi:10.1111/j.1468-232x.2006.00450.x
