How Does an Employee Stock Ownership Plan Work?


Quick Answer

In an employee stock ownership plan, a company creates a trust fund, contributes shares into the trust, and allocates them to the accounts of full-time employees with the aim of creating additional employee benefits, according to the National Center for Employee Ownership. When employees leave the company, the company buys back their stocks at market values or other predetermined rates.

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Full Answer

A company sets aside new shares of its stock or purchases existing stocks and injects them into a trust fund, states the National Center for Employee Ownership. Although there are exceptions, companies usually distribute the shares to employees who are 21 years or older using an equal formula. Employees gain increasing rights to the shares in the account as they rise through the organizational hierarchy. Employees of private companies can use their allocated shares to vote on major issues, but these companies can allow voting on other issues. Employees of public companies can vote on all issues.

Companies use employee stock ownership plans to create a ready market for the shares of departing owners and borrow money at lower after-tax costs, claims the National Center for Employee Ownership. Employees do not pay any tax on the contributions they make to the plan. The law prohibits most professional corporations and partnerships from using employee stock ownership plans.

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