Employee Stock Ownership Plans (ESOP) provide a unique business ownership structure that allows employees to have a stake in the company they work for. ESOPs offer additional benefits for the overall success of the company, as well as for the owners selling shares in the company. Certain types of businesses are especially well suited to ESOPs, as a number of engineering and architecture firms are discovering.
An Employee Stock Ownership Plan (ESOP) is a qualified retirement plan that investments in employer securities. The majority shareholders sell shares of stock to the ESOP trust, giving employees an interest in the company. This provides employees an incentive to work for the success of the business while providing benefits for when they retire. The company contributions to the ESOP are generally tax deductible, and the employees can defer tax until they receive distributions.
Many engineering and architecture professionals are in high demand. This allows other firms to easily poach top talent with a higher salary or greater benefits. One of the benefits of an ESOP is that it gives employees an interest in the long-term success of the business. As they spend more time with the company, they amass a higher value of interest in the ESOP, which they would not want to lose by chasing a slightly higher salary.
Architecture companies and engineering firms are often started by a single individual or small group of founders. As the company grows, the reputation of the business is tied directly to the names of the founders. As these founders get closer to retirement, they want to ensure the reputation of the company will continue, even after they leave.
Selling a closely-held architecture firm or engineering firm carries a number of risks. A new company may come in and “clean house,” firing most employees and bringing on new employees to reduce costs. Other buyers may only be interested in the value in the company's name, with no intention of carrying out the founder's values or attention to quality.
Firm owners may be invested in the continued success of the company and legacy of the founder's name, even after they leave the company. Another benefit of ESOPs is that it provides a transition process from private ownership to employee ownership, based on the owner's terms and timeline.
As the owners determine an ESOP is the best option for the continued success of their firm, they can divest their interest in the company over time. During this time, they can still maintain a majority interest and control of the company, to ensure the company continues the traditions of quality, while rewarding the employees who helped build the company.
If you have any questions about the benefits and drawbacks of an ESOP for your architecture or engineering firm, 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 employee benefits law. Contact our office today with any questions on how we can help you and your business succeed.