Cash and Tax Strategies for Waste Management Companies

Owners of waste management companies shareIn this situation the employer wanted to really put
many of the same cash and tax challenges as all"golden handcuffs" on these key employees and we
business owners. The most recent federal taxstructured a separate plan to be used in addition with
legislation, the Economic Growth and tax Revenue taxthe ESOP plan wherein only these four key
reconciliation Act of 2001 (EGTRRA) positively impactsemployees were included. If the employee of an
some very useful planning tools. This article will discussESOP company will simply provide 100% of his best
two of the plans. The Employee Stock ownership Planeffort to make the company as efficient and profitable
(ESOP) is most appropriate for companies with 25 toas is possible than everyone on the team wins.
500 employees. The IRC Sec. 412 (i) pension plan is aAdditionally, in exactly the same way as publicly held
superb tool for companies with ten (10) or lesscompanies, the value of closely held companies is
employees. When appropriate to do so, both plans canprimarily a function of its earnings. When all employees
be used by the same company by establishingare motivated as a team toward a common goal the
"satellite entities". The specifics of this hybrid design arepositive earnings result can be nothing less than
beyond the scope of this article and can be discusseddramatic. It is also worth noting that business owners
on an individual basis. First we look at the ESOP.enjoy the satisfaction of achieving success in the
The reasons why there is an estimated 1 trillion dollarscapitalistic adventure and I often wonder if this isn't
($1,000,000,000,000) involved in ESOP's are:equally as important as the financial rewards. By
- A business owner can cash out or phase out of hismaking the employees think like owners/capitalists
business- TAX FREE.common objectives are pointed in the same direction.
- Provides "golden handcuffs" for key employees.Without much ado it is self evident that owners
- The company becomes more efficient and profitablealways work harder than employees. Statistics
because owners always work harder than employees.continually bare this out. ESOP companies are from
About three years ago a client whose business was16% to 60% more profitable than their counterparts.
the recycling of paper products decided it was timeDuring slow economic periods ESOP companies are
for a succession plan. He had 25 employees and whilealways better able to weather the difficulties because
he had received some outside offers to purchase hiswhenever everyone has a vested interest, the
business his objective was to transfer ownership tocreative and imaginative energy which owners can
the people who contributed to his success - hisbring to bare on the situation always provides the
employees. As is usually the case, his employeesincremental advantage.
collectively did not have the capital necessary to buyNow a solution for a company with less than twenty
the business from him.five (25) employees. Two years ago I met with a client
Furthermore, I had to apprise my client that if thewho was involved in brokering waste management
owner of a closely held company redeems less thanservices. With only four employees this business
100% of his company stock it would be problematic toowner was showing excellent profit and was tired of
avoid ordinary income tax treatment rather than capitalgiving half of it to Uncle Sam. My recommendation
gains treatment, potentially doubling of the tax burden.was a type of pension plan particularly suited for
An ESOP plan was the solution. The IRS provides ancompanies with few employees with the owner(s)
unequaled tax advantage to business ownersneeding maximum tax relief. This IRC Sec 1412(i) can
encouraging them to sponsor these statutory strategicprovide this group of business owners an opportunity
plans. Essentially, the tax relief provided to businessto make significant tax deductible contributions to plans
owners results in the IRS paying for a significantwhere the lions share of the proceeds will be allocated
portion of the companies purchase price with theto the owners accounts.
employee not required to make any personal out ofWhile the techniques used do not lend themselves to
pocket contributions.mass marketing or media ad campaigns by financial
Additionally, when business owners sell either some orservice companies or to self study, professionals who
all of the stock in their company to their ESOP theyare well versed on this type of program can help
can easily avoid all income and capital gain tax liability.business owners enjoy some very rich in cash tax
The client also indicated that he had four keyadvantages by proper structuring. Members of the
employees which he considered to be very importantwaste management services community should be
to the future success of the corporation. Again, themade aware that the solutions are available to
ESOP provided the solution. The stock which is held inaccomplish the objectives of various size businesses. I
the ESOP trust is allocated to employees based uponhope that I have been able to stimulate the reader to
their compensation. Typically the key employees arebe proactive toward investigating the alternatives to
members of the highest paid group and therefore theyassist them in best accomplishing their objectives for
are going to receive the lion's share of any cash andthemselves and their businesses.
or stock that is being held in the ESOP.