Government Encourages ESOPs for Small Businesses

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Business owners in the 50+ age bracket are finding it increasingly more difficult to find buyers for their business. Congress has created a viable solution to help these small business owners.

Business owners in the 50+ age bracket face a rude awakening. These baby boomers are realizing the cold hard fact that as they approach retirement, it is increasingly more difficult to find buyers for their business. In a survey of small business owners, only 17% expect to close their doors at retirement. The reality is that 85% will have to close shop. Recent studies show that “less than one-third of privately held businesses will successfully continue to the next generation due to a failure in continuing effective management and ownership.” (Source: University of Honolulu and American Bank)

For the last five years, the average number of businesses offered for sale and the number actually sold has been fairly lopsided. In 2000, over 1.5 million businesses were offered for sale yet only 250,000 were successfully sold. This number is expected to become more lopsided as 5.6 million U.S. small business owners retire and try to liquidate their businesses. It will definitely become a buyers’ market.

In 1998, Congress created the S-Corporation ESOP to solve this problem. While Employee Stock Ownership Plans have been around since the 70’s, the Employee Stock Ownership Plan for S-Corporations has only been in place for the last eight years. In 1998, Congress took steps to radically reform ESOPs: they decided to include S-Corporations as a type of company that could be sold to an ESOP. Additionally, they provided that if the business was sold to an ESOP, the company would be exempt from all income tax on its profits. The money the owner used to pay in taxes could now be used to partially or fully fund the sale of the business to the ESOP. Not only does this create a market for smaller companies, it also funds the transaction through tax savings and provides retirement benefits to employees.

Why is the government encouraging ESOPs for small businesses? Evan Rhodes, president of a national ESOP consulting firm says, “The logic is quite simple: the more businesses stay open, the more employees there are to pay taxes and thus create much needed revenue for the government.”

About American Business Resource Corporation

American Business Resource Corporation designs, installs and maintains Employee Stock Ownership Plans (ESOPs) for S-Corporations. Established in 1992, A.B.R.C. has helped hundreds of business owners deal with the challenges of growth, exit and taxes. To learn if you qualify for an ESOP, visit http://www.abrc-esop.com or call (480) 556-9928 toll free 1-866-379-2121.

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