In this video, ESOP attorney Kevin Long explains whether a leveraged or non-leveraged ESOP is the right choice for your company.
Whether you should consider a leveraged or a non-leveraged ESOP for your company comes down to balancing the needs of the different constituencies involved in ESOP planning.
First, from the corporation’s perspective, the corporation has to evaluate its ability to finance a transaction or not.
Second, from the selling shareholders’ perspective, we have to consider how much stock needs to be purchased, how fast, and from whom. Some transactional situations require large blocks of stock to be purchased and financing is almost mandatory.
And then third, the size of the employer ownership interest that the company ultimately wants to have has to be taken into account. For example, does the company want to be a 100% employee-owned company because it’s an S corporation and it wants to achieve full tax-exempt status? In that case, using leverage most often is necessary, but using one form of ESOP leveraged or non-leveraged doesn’t preclude the other. At different points in time, the corporation may or may not need to leverage its ESOP.