ESOP is a qualified retirement plan that transfer all or a portion of the company's stock into a trust administered on behalf of the employees. Typically employees vest shares without any costs to them.
A company should have 40+ employees and $2M+ in revenue to benefit the most from an ESOP structure. Compared to other employee-ownership models, the initial setup and ongoing administrative costs for ESOP is typically higher.
Such a structure typically offers tax benefits for the selling owners, the employees, and the resulting business. As an example, a 100 percent S-Corp ESOP pays no federal income tax and selling owners often qualify for tax benefits when selling 30%+ of the company to an ESOP.
ESOP is regulated by the Employee Retirement Income Security Act and the Department of Labor.