Contributing Author: Gwenllian Kern-Allely, Law Clerk

Since 1974, very little legislation has been passed by the United States Congress regarding employee ownership initiatives. In the last two years, two new bills have made their way through the legislative chambers with the aim of encouraging employee ownership in U.S. companies: the 2017 and 2019 National Defense Authorization. Both bills extend Small Business Administration (“SBA”) loans to companies that transition to an employee owned plan. As small businesses make up 99.7% of all U.S. businesses,[1] the extensions of financial assistance to small businesses is designed to help the economy in the long run.

The 2017 National Defense Authorization Act expands SBA §7A loans to veteran owned businesses and continues the loans even after the company transitions to an employee stock ownership plan (ESOP).  This expansion ensures the continued support of veteran owned small businesses as they create succession and retirement plans.

The 2018 Main Street Employee Ownership Act (“the Act”) received bipartisan support and passed the House of Representatives in May. The Act expands §7(A) of the Small Business Act to allow loans for the creation of qualified employee trusts and allows loans to cooperatives. In addition to expanding the §7(A) loan program, the Act creates a Small Business Development Center and requires the creation of outreach and assistance programs for transitioning businesses to employee ownership through cooperatives and qualified employee trusts.

The Act marks an opportunity for the nation to begin to head off the impending wave of retirees. In the next ten years, 4.15 million business owners will be nearing or reaching the age of retirement.[2] Many of the business owners do not have a succession plan in place for their businesses. In 2015, 48% of California businesses were owned by persons aged 55 and over.[3] With retiring owners, businesses typically take one of two options: liquidation or sale to an outside entity. Both these options can have a negative impact on employees, as layoffs frequently leave fewer people in gainful employment than before. However, there is a third option: creation of a profit sharing plan or an ESOP.

The Act was incorporated into the 2019 National Defense Authorization Act as §862: Opportunities for Employee-Owned Business Concerns Through Small Business Administration Loan Programs. Initially added as §866 to the bill, the incorporated Main Street Employee Ownership Act expands the availability of SBA loans to qualified employee trusts and cooperatives. Additionally, it establishes a Small Business Employee Ownership and Cooperative Program and requires the administrator to coordinate with local employee ownership centers.

The National Defense Authorization Act has passed both the House of Representatives and the Senate in July 2018, and on August 13, 2018 the President signed the N.D.A.A. into law. The signing of the 2019 N.D.A.A. is a major step towards employee ownership initiatives across the nation since the initial emergence of employee ownership in 1974.

Several states have already enacted employee ownership friendly laws. Iowa leads the way with the Iowa Economic Development Authority which, among many other things, helps Iowa small businesses transition to an employee stock ownership plan (ESOP). Iowa and Missouri have tax benefits for employee owners who sell their shares of the business to the ESOP on retirement. In 2017, Colorado enacted a bill requiring state economic development centers to create education programs focusing on the benefits of employee ownership in addition to establishing a revolving loan for businesses seeking to transition to employee ownership.

With the oncoming wave of retirees, succession planning is more important than ever. The solution that preserves jobs and offers the most success for employer and employee alike is a transition to employee ownership. Employee ownership has been shown to create stable jobs and incentives for employees to bring their best to their work. Congress has realized this and several states have already begun their own programs to foster employee ownership among their businesses. Noticeably absent from the employee ownership discussion is California. It is time for the largest economy in the U.S. to take affirmative steps to protect its citizens' jobs, livelihood and its businesses.

[1] U.S. Office of Small Business Administration, 2010 – 2012 U.S. Census Data. https://templatelab.com/small-business-administration-faq/https://www.sba.gov/sites/default/files/FAQ_Sept_2012.pdf

[2] 2015 Annual Survey of Entrepreneurs. 4,150,939 employers were aged 45 and over. https://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ASE_2015_00CSCBO08&prodType=table

[3] 2015 Annual Survey of Entrepreneurs. 77% of business were owned by employers aged 45 and over. https://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ASE_2015_00CSCBO08&prodType=table