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Risks associated with Stock Options. Rules of an ESOP can be complicated. It is subject to fluctuations. It may create a succession problem. ESOPs may risk company finance. ESOP may be incompatible with shareholders. Corporate Governance Considerations with Stock Option Scheme. Conclusion.
How Do You Start an ESOP? To set up an ESOP, you'll have to establish a trust to buy your stock. Then, each year you'll make tax-deductible contributions of company shares, cash for the ESOP to buy company shares, or both. The ESOP trust will own the stock and allocate shares to individual employee's accounts.
You'll not only be looking at the prospect of losing your job, but also losing money on the company stock. It's an example of putting too many eggs in one basket. Remember if a company with an ESOP is struggling financially and has to lay off workers, it may have to cash out workers' shares in the ESOP.
These ESOPs are normally created when a retiring owner wants to transfer the ownership to the employees in the company. On the other hand, an ESPP permits employees to use after-tax wages to purchase the stock in their company, normally at a discounted price.
An Employee Stock Ownership Plan (ESOP) is a tax- qualified retirement plan authorized and encouraged by federal tax and pension laws.