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Which Employee Ownership Model is Right for Your San Diego Business?

Posted by Marc S. Schechter | Sep 13, 2019 | 0 Comments

Multicultural employees

Many businesses are turning towards employee ownership models for the unique benefits offered, including higher worker retention rates or, as recently noted more frequently, as a succession planning option. Business owners who are beginning to explore options for employee ownership may have questions about which form of employee ownership will be best for them and their company. Understanding the features of each type of plan will help you decide which option is best for your business. 

Employee Ownership Options

Some of the more popular models of employee ownership in the U.S. include: 

  • Employee Stock Ownership Plans
  • Employee Ownership Trusts/Perpetual Employee Trusts
  • Worker Cooperatives

Employee Stock Ownership Plans 

The most common employee ownership option is the Employee Stock Ownership Plan (ESOP). According to the National Center for Employee Ownership (NCEO), there are approximately 6,500 ESOPs in the U.S., with about 14 million employee-participants. Some of the largest ESOP companies include grocery stores Publix and WinCo. Other industries which utilize the ESOP structure in San Diego include breweries like Modern Times and architecture firms like JCJ Architecture.  

Benefits of an ESOP include tax deferred and tax savings for workers and tax savings for owners selling the business to the ESOP trust. The repayment of the trust loan is generally tax-deductible and workers are not taxed on their ESOP benefits until retirement. Owners may even be able to defer or eliminate income taxation on the sale of shares to the ESOP. 

The costs of setting up and administering an ESOP may be higher than other options; however, the tax savings can offset these expenses, especially for larger businesses. However, ESOP transitions can be set up to provide flexibility for the owners who may be preparing for retirement while still wanting to maintain some control over the company until they are ready to retire. 

Employee Ownership Trusts/Perpetual Employee Trusts

Employee Ownership Trusts (EOTs), also called Perpetual Employee Trusts, can be flexible and set up with just about any purpose under U.S. trust law. EOTs are more well-known in the U.K. but more companies in the U.S. are using trusts to create their own business models with employee-stakeholder provisions. EOTs can be set up similar to an ESOP where the owner sells the shares to the trust, to be repaid over time from future profits. 

Where ESOPs provide a majority of employee benefits in the form of retirement savings, EOTs are not retirement savings plans. They are primarily set up to benefit workers during employment through profit sharing instead of after retirement. However, EOTs could be structured to set aside a certain amount of funding towards more traditional retirement contributions, like a 401(k) plan. 

The benefit of an EOT is flexibility. Younger employees may also appreciate the annual profit sharing to allow them to pay off student loan debts or set aside money for a down payment instead of being limited to retirement savings. However, a major drawback for business owners is that EOTs cannot take advantage of many of the tax benefits afforded ESOPs.

Worker Cooperatives

Worker-owned cooperatives are owned and managed by workers. Worker cooperatives benefit from lower set-up and administration costs and are popular for smaller businesses. Worker co-ops have limited tax savings but owners may be able to take advantage of capital gains deferral. For workers, the benefits primarily come in the form of democracy in how the company operates and profit-sharing (which may be tax-deductible to the business). 

Employee Ownership for San Diego Businesses

There are a number of employee ownership models available for businesses in San Diego. These options can be structured to best suit the needs of your business, including as a succession plan for retirement. If you have any questions about employee ownership 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.

About the Author

Marc S. Schechter

Marc Schechter specializes in the areas of employee benefits, ERISA, and business matters.

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