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Next-gen company ownership: States supporting employees as successors

April 18, 2019
By: Jason Rittenberg

As the American population ages — by 2035, the country will have more people aged at least 65 than under 18 — so do the country’s business owners. Over the past few years, several studies have attempted to measure how many companies may transition ownership over the next decade, with estimates ranging as high as 10 million small businesses. These studies generally agree that while changes are on the horizon, few companies are even as prepared as having identified a potential successor. Colorado and Massachusetts are stepping into this planning void with a suggestion of their own: transitioning interested small businesses to employee ownership.

In Colorado, Gov. Jared Polis has made employee ownership a priority of his administration. Per a program analyst for the state, Colorado’s goal is to make the state, “the Delaware of employee ownership.” To this end, the Colorado Office of Economic Development and International Trade (OEDIT) is establishing an Employee Ownership Center. In 2017, the legislature approved an initiative to provide 50 percent, up to $10,000, in administrative costs for companies forming an employee stock ownership plan (ESOP). The program was not directly funded, instead directing OEDIT to use donations or grants to fund the program.

Massachusetts is launching an educational campaign. The state is restarting its Office for Employee Involvement and Ownership, which was created in the late 1980s but has not been funded since 2008. For now, the actions of the office are focused on hiring two consulting firms to educate and support transitions to employee ownership. ICA Group, one of the contractors, estimates 28,000 firms in the state have 10-100 employees and could be ready to sell within six years. Massachusetts, however, is starting small: the funding toward this effort was $150,000 in FY 2018 and $50,000 in FY 2019.

While these are the latest actions among states to advance employee ownership models, several states have longer running programs. The most robust approach is offered by the Iowa Economic Development Authority, which supports feasibility studies (50 percent, up to $25,000, with half released at study’s completion at half after an ESOP formation) and reduce stock sale-related taxes.

States interested in encouraging worker ownership models can also look to a growing body of policy recommendations. For example, the Aspen Institute includes worker ownership as a tool for the future of work, and suggests limiting executive compensation deductions for companies that do not open up their ownership model. To better understand the various employee ownership models, see the information and resources below.

Forms of worker ownership

Model Stock Treatment Management Implications
ESOP Regulated and tax-preferred retirement plan with stocks issued from a trust to employees Can include employee direction of the shares' voting rights.
Worker Co-op Each worker has an equal share of the business Each worker has an equal vote on decisions.
Compenstation or Hybrid Variable. Profit-sharing or equity compensation are common forms. Variable. Equity compensation should include standard shareholder rights.


Further Reading

Brill, A. (2012). An Analysis of the benefits S ESOPs Provide the U.S. Economy and Workforce. Washington, D.C.: Matrix Global Advisors. Available: https://community-wealth.org/content/analysis-benefits-s-esops-provide-us-economy-and-workforce.

Aspen Institute. (2017). Toward a New Capitalism: A Policy Agenda to Restore the Promise of Work. Washington, D.C.: Aspen Institute. Available: https://assets.aspeninstitute.org/content/uploads/2017/01/New_Capitalism_Policy_Agenda.pdf.

ICA Group. (2015). Types of Employee Ownership. Available: https://ica-group.org/wp-content/uploads/2015/04/Types-of-Employee-Ownership.pdf.

Kern-Alley, G. (2018, Sept. 24). “The Many Forms of Employee Ownership: ESOPs, Co-Ops, Profit-Sharing Plans, and Equity Compensation Plans.” Butterfield Schechter LLP Blog. Available: https://www.bsllp.com/the-many-forms-of-employee-ownership-esops-co-ops-profit-sharing-plans-and-equity-compensation-plans.