ESOPs & Succession Planning for your Transportation company

Jul 26, 2022Employee Benefit Plans, Estate & Retirement Planning, Transportation

Succession Planning – the process and strategy for identifying the critical positions within your transportation company and developing an action plan for potential leaders.

This article will provide insight on employee stock ownership plans (ESOP) and how they can be an option for succession planning for transportation companies. An ESOP can provide many benefits, such as tax savings for owners and the business and increasing the culture of ownership by involving employees who have shown service and loyalty. No matter what succession planning strategy is used, it is crucial to establish a plan early and set goals to achieve the objective.

Understanding ESOPs for Transportation Business

ESOP Basics

An Employee Stock Ownership Plan, or ESOP, is a qualified defined contribution employee benefit plan authorized under the Employee Retirement Income Security Act (ERISA). This type of plan is similar to the popular 401k profit-sharing plan that many businesses use. Here are a few basics of an ESOP:

  • It can provide employees with the opportunity to own shares of stock in the company.
  • It can be used in conjunction with other retirement plans, such as a 401k plan. However, often an ESOP is used as a replacement for other traditional retirement plans.
  • An ESOP is a tax-deferred investment of shares of company stock allocated to each eligible employee’s account. Ideally, the stock will appreciate over time as the business grows.
  • An ESOP is structured as a trust, with the employees as beneficiaries of that trust. An individual appointed as a trustee administers the plan and makes the majority of the decisions. After the ESOP is created, significant corporate actions usually are voted on by participants in the plan.
  • An ESOP can be funded by cash, stock, or debt. Regardless of how it is funded, cash must be available to pay out to exiting owners who retire or otherwise terminate employment.
  • An annual business valuation is required by an independent professional to determine the fair market value of the business for purposes of determining participant account balances for the plan.

ESOP Benefits for Employees

  • Ownership and retirement savings are directly affected by the success of the business. Employees can align their goals with the company in order to drive growth.
  • Any growth in the retirement plan is tax deferred until the employee retires.
  • There is a guaranteed market for sale of shares in the plan. When an employee retires, the ESOP agrees to repurchase those shares at the fair market value.

ESOP Benefits for Shareholder/Employer

  • If the ESOP purchases at least 30 percent of a C corporation’s outstanding stock, the previous owners can elect a Section 1042 Rollover to avoid paying capital gains tax on the sale of their stock. To do so, all sales proceeds must be placed in a qualified replacement property. The selling owners will pay capital gains tax only when they sell their replacement investments.
    • Qualified replacement property (QRP) – any security issued by a domestic “operating corporation.” An “operating corporation” is a business that, for the taxable year preceding the taxable year in which such security was purchased, had no passive investment income
    • An ESOP may own a portion or all of the stock in a company.
  • If the transportation business is structured as a C Corporation, dividends paid on ESOP-held stock are tax deductible.
  • If the business is structured as an S Corporation, the portion of earnings related to the ownership of the ESOP will pass through to the ESOP (rather than to individual shareholders) and avoid taxation by the individual shareholders.
  • Selling an ESOP will result in a stock sale versus an asset sale. Given the large amount of depreciation recapture built up from vehicles and other equipment, it may be more advantageous to sell stock than assets and receive favorable tax treatment.

ESOPs for Transportation Companies

Historically, many transportation companies have not utilized ESOPs. Setting up an ESOP requires available cash or the ability to take on more debt. Based on how transportation industry participants typically operate, these factors can make it difficult for companies that are heavily leveraged and require large annual capital expenditures. Even if cash restrictions and/or leverage limitations make it difficult to implement an ESOP, the benefits listed above still apply.

Does an ESOP Make Sense for your Business?

Historically, the ideal structure for implementing an ESOP consists of 20 employees or more and annual revenues of $10 million or more. The company must be large enough to spread out various plan costs and investment risks across the participating employees. Below are the general attributes of companies that may or may not want to consider implementing an ESOP:


  • The business has low debt levels and can finance all or a portion of an ESOP transaction.
  • The company is intended to be transferred to employees (no family in place to take over).
  • The current employee pool is expansive (50 or more) and has qualified management candidates.
  • The owner(s) is willing to receive a significant portion of the benefits of ownership change over a period of time.
  • The company has predictable cash flow and consistent historical earnings performance (no substantial, out-of-the-ordinary large capital expenditures expected for the future).


  • The business is already heavily leveraged with debt and would not be able to finance an ESOP.
  • The business is intended to stay in the family.
  • The current employee pool is not qualified to run the business without current ownership, or the existing employee group is small (20 or less).
  • The owner(s) is looking to receive a large part of the benefits of ownership change immediately or in a relatively short time period.
  • The company has unpredictable cash flow and historical earnings performance (this may include large unusual capital expenditures that may be needed in the future).

Contact Us

Due to their significant tax benefits over other exit strategies, employee stock ownership plans have been a compelling succession planning option for transportation companies. If you answered “yes,” to the above and think an ESOP may make sense for your transportation business, let’s talk.

Smith Schafer experts can help determine why and when an ESOP makes sense, the fair market value for your transportation company, and assist in evaluating the exit strategy structure that meets your goals.


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