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ESOPs Help Keep Firms, Jobs in Town

As seen in the Business Courier.

Now, in the middle of the presidential campaign, the issue of jobs is at the top of the agenda. With unemployment hovering at 8%, it is important that the US economy create and preserve stable, well-paid jobs that provide security for employees and their communities.

At the same time it seems that many companies with long histories in their communities are changing hands. Often, this change is accompanied by large layoffs or restructuring. In many cases, the company ceases to exist in any recognizable form. Those employers that continue are often forced to outsource much of their processes so that they can stay competitive in a world market.

It’s not possible to repeal the laws of economics, but you may be surprised to hear that there is a device that addresses all of these issues. It has been used by thousands of companies throughout the US, to benefit more than 10 million workers. These include everyone from front-line or shop-floor employees up through senior management. I’m speaking about an employee stock ownership plan – ESOP for short.

What is an ESOP? Simply put, it’s a retirement plan – similar to a 401(k) plan – that is allowed to own employer stock. The stock is purchased from an existing owner, or from the company itself, and is then allocated to an “account” in the name of each participating employee. When the employee retires, he or she receives the value of the stock.

Ultimately, the cost of an ESOP is funded entirely by the company.. Employees have shares allocated to their account for each year they work for the company. If the value of the shares goes up, so does the value of their account.

So how does an ESOP address problems in our economy?

First, ESOPs help preserve jobs. The 2010 General Social Survey found that, in companies with broad-based employee ownership, 3% of employee were laid off during 2009-2010, as compared to 12% for companies without employee ownership. The same study also found that 13% of employees with stock ownership intended to leave their companies in the near future, as compared to 24% for other employees.

Second, ESOP companies provide a better working life for their employees. According to a report published by the National Bureau of Economic Research, employee-owned companies provide higher pay and benefits, greater employee participation, and have better labor-management relations.

Third, ESOP companies perform better. Research by Rutgers University and the City University of New York indicates that employee-owned companies have higher sales per employee, are more productive, and stay in business longer.

Fourth, ESOP companies have significant tax benefits. Companies that elect treatment as an S corporation can avoid the double taxation of income which normally applies to C corporations. Because shares are held in a tax-exempt plan trust, the income earned by the company will remain functionally tax-exempt until it is distributed to employees at retirement.

Finally, an ESOP can provide a “win-win” exit strategy for an individual or family looking for a way to sell a business. Frequently, a sale to a third party will mean that the owner and their family immediately stops being involved in the business to which they have devoted a good portion of their lives. The operations may close, or move away, and this can cause the employees of the company to feel mistreated or betrayed. On the other hand, ESOP companies typically continue to operate mostly as they did before the sale, with the major difference being more employee enthusiasm and involvement. A selling owner who wants to remain involved in the business can do so. And an employee-owned company is unlikely to move its operations overseas.

ESOPs can address many of the problems in today’s economy. It helps create and preserve jobs, increases stability and job satisfaction, and provides an exit strategy for business owners. With all of these benefits, it is not surprising that many politicians across the political spectrum are strong supporters of ESOPs.

© 2019 Dinsmore & Shohl LLP. All rights reserved.


About this Author

Ben F. Wells, Dinsmore Shohl, Wealth Planning Lawyer


Ben Wells is a Partner in the Corporate Department and is Chair of the firm's Tax, Benefits and Wealth Planning Practice Group. He leads the firm's Fringe Benefits Committee and is a member of its Practice Management Council. Over a period of more than 25 years, Ben has advised and counseled clients on a full range of issues relating to employee benefits and executive compensation.

Ben works with Fortune 500 companies, privately held employers, not-for-profit employers, state and local governmental entities, health care providers, private equity investors, ERISA plan...