ESOP as Exit Strategy

Source: Accounting Today

It may surprise you to learn that an employee stock ownership plan (ESOP) can provide a flexible, tax-advantaged exit strategy for CPA firm owners. At one time, state law generally prohibited accounting firm ESOPs, but today 40 states allow them. And so long as the ESOP's trustees are accountants, the firm will continue to satisfy state laws that limit ownership to accountants.

• ESOPs offer several important benefits, including:
• Unlike a sale of the firm, an ESOP allows some partners to exit while others continue with the firm.
• Partners can sell their entire interest to the ESOP at once or gradually over time.
• The firm finances purchases with tax-deductible contributions.
• Under certain circumstances, sellers have an opportunity to defer taxes on sale of their interests.
• Firms organized as S corporations are not subject to federal tax on income attributable to ESOP-owned shares.
• Companies with ESOPs tend to perform better.

There are also several disadvantages:

• The firm must be a C corporation or an S corporation, or be willing to convert.
• An ESOP is a qualified employee benefit plan, so all employees must have an opportunity to participate on a nondiscriminatory basis.
• ESOP valuations must be conducted annually by an independent appraiser.
• ESOPs are expensive to set up and must be paid for out of corporate profits.

For the complete article, read “Partners need to sell? An ESOP might be the answer.”

From Accounting Today, December 1, 2011, SourceMedia Inc., One State Street Plaza, 27th Floor, New York, NY 10004, 800-221-1809.