An Employee Stock Ownership Plan (ESOP), is a tax-qualified, defined-contribution employee benefit plan. It's similar to a profit sharing plan, but is designed to invest in employer stock for the benefit of employees, rather than the stock of other companies. An ESOP can also provide substantial tax benefits to your company if you sponsor such a plan.
ESOPs - How the Process Works
If an ESOP borrows money to buy company shares (from either the company, the selling shareholder or a bank), it's called a Leveraged ESOP.
A Leveraged ESOP (ESOP loan) from First American is typically structured as follows:
1. Your company borrows funds from First American Bank.
2. A second "mirror" loan is established between the ESOP trust and your company.
3. The ESOP uses the funds to purchase either stock from existing shareholders or newly issued stock.
4. Your company makes annual tax-deductible contributions to the ESOP, which the ESOP uses to make its loan payments to your company.
5. Your company then uses the funds to repay the loan from First American Bank.