Employee Ownership Agreement

People who sell shares to a workers` cooperative are exempt from capital gains tax when the profit is reinvested in U.S. securities. Cooperatives are exempt from the double taxation of dividends paid to workers on the basis of working time or salary and not own funds. In any case, most small businesses do not have to pay dividends (see discussion of financial benefits in a corporation), but this exemption gives co-ops more flexible tax planning options than others, allowing them to treat profits either as an “S” corporation or as a “C” corporation without changing their legal structure. What for? If the business is successful, there may be a situation in which the majority owner (or an alliance of owners who together control the majority of the shares) finds that the actual value per share of the business far exceeds the price set by the shareholders` agreement for the repurchase of the shares of a licensed employee. This creates the necessary conditions for an aggressive majority shareholder to exercise managerial power and terminate the minority owner`s employment relationship, forcing the minority owner to sell his shares at the price of the shareholder`s contract, well below their real value, to the great financial advantage of the majority owner. Essentially, the controlling shareholder can use his power to control employment decisions as an instrument to acquire the value of the minority owner`s and employee`s shares through a forced buyback. EOT shares are not allocated to individual accounts and should therefore never be redeemed by outgoing employees. By avoiding repurchase obligations, a future cash flow planning problem is a major problem for ESOP companies. According to the NCEO, there are three main reasons why a business is owned by employees. This may be because the original owner of a private company is leaving, so the organization buys those shares with tax-deductible contributions to the plan. An ESOP can also borrow money to buy shares of existing owners, under which it contributes to the tax deductibility of the loan repayment plan. Finally, a company could only offer an ESOP to bring added value to its employees.

For many small businesses, these plans are best suited because they are very simple.

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