Leveraged Employee Stock Ownership Plan (LESOP) Overview

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Updated January 04, 2023

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What Is a Leveraged 🍌Employee Stock Ownership 🧸Plan (LESOP)?

A leveraged employee stock ownership plan (LESOP) is an employee compensation program in which the sponsoring company leverages its own credit and borrows the money used to fund the plan and purchase shares from the company's treasury. These shares are then used for the 澳洲幸运5官方开奖结果体彩网:stock ownership plan (ESOPౠ), with the 𒅌company subsequently paying back the original loan with annual contributions.

Key Takeaways

A leveraged employee stock ownership plan (LESOP) uses borrowed money to fund an ESOP as a form of equity compensation for employees.
The company borrows against its assets and then repays the loan used to fund the ESOP via annual contributions.
The benefit of a LESOP is that a company does not need to expend cash up-front to fund the ESOP.
However, since it involves taking on a large amount of debt, it must be executed with caution.

♔ Understanding Leveraged Employee Stock Ownership Plans (LESOPs)

Typically, companies choose to use ESOPs or other 澳洲幸运5官方开奖结果体彩网:equity compensation programs to tie a portion of their employees' interests to the bottom-line share price performance of the company's stock. In this way, participating employees are given an incentive to ensure the company'𓆏s operations run as smoothly and profitably as possible.

Important

Companies often use ESOPs as a 澳洲幸运5官方开奖结果体彩网:corporate finance strateꦯgy to align th꧑e interests of their employees with those of their shareholders.

By leveraging company assets, the business can provide for its stock ownership plan and give workers ownership interest in t꧂he company without immediately putting up all the capit🐭al required to do so.

LESOPs use the proceeds of bank loans to purchase company stock from the company or its existing shareholders at a sale price established by independent 澳洲幸运5官方开奖结果体彩网:appraisers. The lending bank holds the purchased shares as 澳洲幸运5官方开奖结果体彩网:collateral and typically requires payment guarantees from either the company, the remaining shareholders, or the sel𝓀ling shareholders.

Tax Considerations

LESOPs serve as a tax-advantaged method of financing corporate growth because shares allocated to an employee's account are not taxed until distributions are received, which generally occurs after an employee ends their t👍enure with a company.

Due to deduction limitations dictated under tax laws, employer contributions made to make annual loan payments may not exceed 25% of a participating employee's annual compensation. Additionally, a company may limit LESOP participation to employees who are over age 21, and who have completed at least one year of service.

Potential Downsides♌ to a Leveraged Employee Stock Ownership Plan (LESOP)

Despite the tax-deferred benefit participating LESOP employees enjoy, this plan isn’t🌜 without potential downsides—chief among them: an inherent investment risk.

Since a LESOP functions as a substitution for other types of 澳洲幸运5官方开奖结果体彩网:qualified retirement plans, they may lack the 澳洲幸运5官方开奖结果体彩网:diversification of a typical retirement portfolio, such as a 401(k) plan, and be too concentrated in company stock. Employees who reach the age of 55, and have completed at least ten years o👍f participation in a LESOP, are permitted to diversify 50% of their accounts, over five yওears, in investments other than their own company’s stock.

Additionally, since a LESOP involves borrowing it can mar a young company's 澳洲幸运5官方开奖结果体彩网:debt-to-income (DTI) or debt-to-equity (D/E) ratio, making it appear as a less attractive investment than it may otherwise be. Moreover, if a company ❀cannot repay its LESOP debts, the lender can seize the assets put up as collateral.

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