Southern California business owners in the specialty food industry know how difficult it can be to succeed in the ever-changing and competitive market. One of the greatest assets any business can have is a dedicated group of employees committed to the continued growth of the company. To both foster and reward worker retention and productivity, many companies are turning to employee ownership. Of course, the tax benefits available to businesses and shareholders help make employee ownership even more attractive.
Employee ownership, especially Employee Stock Ownership Plans (ESOPs), offer a number of benefits for business owners, employees, and the company overall. Many businesses in the specialty food and beverage industry can take advantage of the unique benefits afforded by an ESOP, especially at a time when the owners are looking towards retirement.
According to an article from the Specialty Food Association, “specialty food business decision-makers are turning to employee stock ownership plans, known as ESOPs, to help engage employees beyond just punching the clock.”
Some examples of ESOPs in the specialty food industry include Litehouse Foods based in Idaho, and Oregon's Bob's Red Mill. In addition to employee-owned food companies, there are a number of craft breweries that have become employee-owned, including San Diego's Modern Times.
An ESOP is a type of qualified retirement plan that invests primarily in employer securities. Eligible employees are provided a stock ownership interest allocated to their account under the ESOP as a benefit of working for the company. When the employee retires, the company generally buys back the shares from the participants account at the then appraised fair market value.
ESOPs can provide a number of unique benefits to owners, employees, and the business. For the business' benefit, studies have shown that employee-owned companies average higher productivity and lower turnover. Another company benefit, which can be of importance in many specialty food companies, is the ability to maintain corporate culture with employees who care about the product and community while providing employer-funded retirement benefits.
Shareholders and the business can also take advantage of ESOP tax benefits. For the company, contributions to the ESOP can be tax deductible, up to 25% of company payroll. As a result, payments of the principal and interest on repayment of the loan by the ESOP incurred to acquire the shares are both to repay the ESOP loan can also be tax deductible. Employees are not taxed on contributions until they take distribution of their stock interest. Employees can also defer the tax on ESOP distributions by rolling them into an IRA.
For owners, an ESOP provides a ready buyer when the business operates in a niche market or there are no buyers to pay fair market value and in many circumstances can even defer the capital gain on the proceeds they receive from sale of their shares to an ESOP. It is also a way for owners and founders to avoid major changes in corporate culture when they decide to retire. An ESOP can provide a transition of ownership under the leadership of the original owners until the owner, employees, and vendors are happy that the company will continue to operate as expected.
If you have any questions about how an ESOP could benefit your food industry business, Butterfield Schechter LLP is here to help. We are San Diego County's largest law firm focusing its law practice on employee benefits. Contact our office today with any questions on how we can help you and your business continue to grow in the future.