Transitioning to 100% ESOP Owned

[Guest tm3333]

C-Corp with ESOP wants to become 100% ESOP owned, but unsure what options are available to get the remaining shares held outside of the ESOP into the ESOP. All shareholders holding stock outside the ESOP are in agreement to have the corporation 100% ESOP owned. No shareholder wants to do a 1042 transaction.

Can the corporation complete a redemption of the remaining shares and then cancel the shares or transfer to the ESOP? Can the ESOP purchase the remaining shares from the shareholders? What option would minimize the tax consequences to the shareholders and the corporation?

[ESOP Guy]

You are asking a large questions. It is kind of beyond the scope of a chat board.

Whenever I run into people who are thinking about ESOPs I tell them the same thing.

Start by going to some of the ESOP Assoc. or NCEO conferences and just meet and talk with people who have set up an ESOP.

I interact with the NCEO more than ESOP Assoc. but if you become a member they have great material and free webinars through the year. Do your research. Get a handle on the concept known as repurchase obligation. This becomes the obsession of most ESOP companies. The repurchase obligation is the cash flow needed to pay terminated employees their benefit. The company has to make sure the ESOP will have enough cash to pay people their benefits. That seems like the big issue for any ESOP company.

To give basic answers to your questions the ESOP can buy the stock directly. Most likely that is the best tax situation for the company as it can use after-tax dollars to buy the shares.

[GMK]

Good answer, ESOP Guy.

The company has to make sure the ESOP will have enough cash to pay people their benefits.

The ESOP can hold the cash, or the company can keep it for buying back shares that ESOP distributes. Either way, adequate cash needs to be available.

I suggest that the company find legal and tax people who understand ESOPs and discuss with them the options for setting up the ESOP and the important details in running the ESOP.