Earlier this month, we wrote about ESOPs as a succession planning tool for construction company owners. However, there are a number of other reasons why construction and manufacturing companies are turning to ESOPs beyond succession planning.
An Employee Stock Ownership Plan (ESOP) is a qualified retirement plan that investments in employer securities. ESOPs allow employees to have a stake in the company they work for through stock interest as a benefit of working for the company.
As mentioned in the previous blog post, one of the benefits of an ESOP for a closely held construction company is for succession planning. An ESOP provides for a smooth transition to an employee-owned business at a time when the owner is ready to step back from the day-to-day running of the company.
If a construction company owner is looking to sell the company, it may be difficult to find the right buyer. The owner may have an interest in getting a fair price, offering protections to long-term employees who helped grow the company, and protect the family name of the construction company. However, the buyer may be unwilling to pay a fair price or have no interest in protecting the hard-earned reputation of the company. Instead, a new owner may only be concerned with profit and have no interest in employee loyalty or current business relationships.
An ESOP provides an instant buyer at a fair price, more than a traditional buyer may be willing to pay. An ESOP can also maintain the corporate culture that helped make the company what it is. Ownership in the company is also a great motivational incentive for workers to take an interest in the overall success of the company and benefit directly from the company's continued success.
While construction companies often go through boom and bust cycles directly related to the economy, long-term stability is a valuable asset to the construction industry. When a construction company is contracting for a public works project, the surety company wants a guarantee that the company will continue operations as expected until the projects are finished.
The sale of the construction company may be a red flag of uncertainty to customers or insurers. However, an ESOP allows the company to continue business as usual during a transition period and ease the minds of project managers and the surety companies.
ESOPs can also help a construction company reduce corporate tax liability. The tax benefits may depend on the type of corporate tax structure of the company, such as an S-Corp or C-Corp. With a C-Corp, shareholders who sell to the ESOP may be able to defer the gain on the sale if the ESOP owns at least 30% of the shares, the shareholder has held the shares for at least 3 years, and the proceeds are used to purchase qualified replacement property (QRP).
If you have any questions about the benefits of an ESOP for your company, the law firm of Butterfield Schechter LLP is here to help. We are San Diego County's largest law firm focusing its law practice on ERISA and employee benefits law. Contact our office today with any questions on how we can help you and your business succeed.