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The Employee Ownership Update

Loren Rodgers

August 1, 2012

(Loren Rodgers)

New Report Shows That ESOP Companies Generate More Jobs

In a study (PDF format) released on July 26, Alex Brill, a former advisor to the Simpson-Bowles bipartisan deficit reduction commission and a fellow at the American Enterprise Institute, concludes "The unique strengths of employee ownership drove company gains and jobs in the past decade, while helping insulate S-ESOP businesses from the adverse effects of the recent recession." Brill found that members of Employee-Owned S Corporations of America increased employment by 60% over the past decade, versus flat employment in the economy as a whole. In response to the report, Ron Kind (D-Wis.) and Erik Paulsen (R-Minn.) of the House Ways and Means Committee wrote, "It's time to reach across the aisle, find the common ground that we know exists, and do everything we can to get our economy back on track and create the good paying jobs we need to sustain economic growth. By fostering highly productive companies, allowing employers to hire and retain employees, and then encouraging saving for sound retirement, the ESOP model can continue to help American workers and middle class families."

ESOP Capital Gains Deduction in Iowa

The governor of Iowa, Terry Branstad, recently signed into law a bill to encourage the creation of ESOPs. The effect of the provision is to create a 50% reduction of Iowa capital gains taxes for business owners selling to an ESOP as long as the ESOP owns at least 30% of the company after the sale. The provision apparently requires sellers to choose between the Iowa tax break and the Section 1042 federal tax incentive, which have significant differences. First, the Iowa legislation does not require the seller to buy qualified reinvestment property (QRP) with the proceeds of the sale. Secondly, the Iowa legislation does not distinguish between C and S corporations, while Section 1042 only applies to C corporations.

JOBS Act Excludes Shares from Compensation Plans from Shareholder Limits

The JOBS Act raised the threshold from 500 to 2,000 on the number of shareholders a closely held company can have before the company becomes treated as a de facto public company. One of the less publicized provisions of the act excludes shares employees receive pursuant to an employee compensation plan from this limit. Ownership from qualified employee benefit plans, such as ESOPs, was already excluded, but this new provision would also apparently exempt, most notably, shares from stock options and employee stock purchase plans. These securities already do not count until they are exercised, but the new law presumably includes them after they are exercised as well. The SEC will have to draft specific regulations.

Employee Ownership Advances in South Africa

South Africa held a conference on employee ownership hosted by the Industrial Development Corporation. Attendees represented many employee ownership companies, service providers to those companies, the government, and quasi-governmental agencies that support employee ownership. Much of the employee ownership in South Africa is driven by Black Economic Empowerment legislation, and participants explored ownership culture, financing alternatives, case studies, and began the formation of an employee ownership center for South Africa. Loren Rodgers and Corey Rosen of the NCEO were speakers.

The Compelling Illogic of ESOPs

Steve Parrish, a contributing writer at Forbes, wrote an article describing four illogical ways that ESOPs benefit company owners, from seeing the tax code as a friend to business, to borrowing to fund retirement, or, as he puts it, "the best way to keep your business is to sell it."

Select NCEO Seminars and Webinars Offer IRS Credit

In addition to CPE credits (for accountants) and HRCI credits (for human resources personnel), select NCEO seminars and Webinars now offer IRS continuing education credit for enrolled retirement plan agents.

Author biography and other columns in this series

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