A new bill was introduced in California on February 22, 2019, by Senator Scott Wilk (R). The bill, SB-553, would provide an incentive for some California businesses to adopt employee stock ownership plans, better known as ESOPs. Two major problems facing the United States today are the vast number of Americans with little to no retirement savings and the many owners of small- to medium-sized businesses with no succession plan in place for when they retire. The widespread adoption of an ESOP program may be a solution to both of these problems. Other states in the United States have recognized the potential benefits of ESOP adoption and have already put in place ESOP-friendly legislation. These states include Iowa, Missouri, and Colorado.
In order to promote the adoption of ESOPs, Iowa and Missouri have elected to introduce legislation that would allow for the exemption of up to 50% of the net income from taxation if a company is sold to an ESOP that owns at least 30% of the company. In addition, the Iowa legislation also allows the Iowa Economic Development Authority to provide up to $25,000 for the initial valuation of the business for a sale to an ESOP. In Colorado, recent legislation requires the engagement of local non-profits to provide employee ownership information to local businesses and sets up a revolving $10,000 loan to assist in the transition to employee ownership. California has not passed any ESOP-friendly legislation yet; however, with SB-553 under consideration, that may be about to change.
If SB-553 were to be made into law, California would not only be providing a much needed incentive for many California businesses to adopt ESOPs, but the state would also be signaling a willingness to cultivate an ESOP-friendly legislative atmosphere. In California, the State Contract Act governs state contracts for public works projects and generally requires that a contract be rewarded to the lowest responsible bidder. Under SB-553, an entity awarding a contract under this Act would be required to provide a 3% bid preference to a qualified ESOP-owned business bidder. For the purposes of SB-553, a qualified ESOP bidder is an 1) ESOP or 2) S corporation ESOP that is 100% owned and operated by employee owners. The passage of this legislation would constitute a much needed first step in California state law towards the promotion of ESOPs in the state, which can lead to increased worker productivity, higher rates of worker satisfaction, lower employee turnover, higher retirement savings, and the peace of mind for business owners that will come with the establishment of a succession plan.
If you have any questions about employee ownership and ESOPs for your California company, Butterfield Schechter LLP is here to help. We are San Diego County's largest law firm with a focus on employee benefits law. Contact our office today with any questions on how we can help you and your business succeed.
