Employee ownership remains a bipartisan initiative because of the widely acknowledged benefits to job creation, employee retention, and healthy communities. Recent developments in legislation support this movement.
To help make sense of it all, we have assembled a brief overview of legislative enactments and advancements that support the movement to grow employee ownership as part of the U.S. economy.
Legislation Enacted
The National Defense Authorization Act (NDAA) was enacted in December 2021. The NDAA required the Department of Defense (DOD) to establish a five-year pilot program for businesses that are or will be 100% Employee Stock Ownership Plan (ESOP)-owned. Noncompete follow-on contracts would be available to all 100% ESOP businesses. To encourage greater collaboration and ease barriers to entry, the NDAA directed the DOD to look for incentives to encourage contractors to establish 100% ESOP-owned companies.
The American Plan Rescue Act of 2021 (ARPA) continued funding for the State Small Business Credit Initiative (SSBCI), which was created to help small business access capital necessary for business development and growth. Although these funds could not previously be used to acquire shares in a business, regulations issued in November 2021 now allow funds lent under the SSBCI program to be used to fund an ESOP buy-out. This program may allow more favorable borrowing terms from senior or mezzanine lenders, allowing for better financing of ESOP buy-outs.
Colorado passed legislation that would help reduce some of the costs of forming an ESOP. In a first-of-its-kind bill, Colorado will provide a tax credit to cover up to $50,000 of costs associated with forming an ESOP.
Iowa passed legislation that eliminates state taxes on retirement income, including taxes on ESOP distributions. This important change has the power to motivate more Iowa business owners to sell their businesses to their employees as a business succession plan.
Legislation Advanced
The New York Senate just passed a bill that removes critical barriers for engineering, architectural, and other similar firms in becoming majority or completely ESOP-owned. If enacted, the bill would allow firms to pursue ESOPs if at least 75% of the company’s trustees or ESOP plan committee are licensed professionals, rather than the historical precedent which requires that a majority of the owners be licensed professionals.
The Texas House of Representatives State Affairs Committee passed a pro-ESOP ownership bill that would remove certain barriers to creating an ESOP company. If enacted, the bill would:
Allow companies providing licensed professional services to be majority or wholly ESOP-owned if the voting trustee is licensed in that profession
Provide a path for Historically Underutilized Businesses to become ESOP-owned without losing their status
Create contracting incentives for government agencies to do business with ESOPs
Provide funds to establish an ESOP development agency
These legislative developments reinforce the vital role middle market businesses play in the U.S. economy and employee stock ownership plans are becoming more widely recognized as a catalyst for supporting state and national economic health while creating distinctly beneficial paths for private business owners to secure their legacy and succession planning outcomes.
As always, our team is available to help illuminate how these insights might benefit your succession planning efforts.
