The ESOP-erative

Summary

A new design: worker cooperative governance with ESOP tax benefits.

Businesses interested in transitioning into employee ownership are often presented with a structural dilemma: convert into an ESOP or a cooperative? Go for the democratic worker control and participation of a cooperative, or the tax benefits of an ESOP? I recently helped a company, Sun Light & Power, combine the two in an innovative design that others might find of interest.

A cooperative is attractive in principal because its legal structure inherently assures democratic ownership and governance. Cooperative employee-owners decide their own pay scales, schedules and management structure. Each member of the cooperative typically purchases one share, so all worker-owners have the same ownership interest and an equal voice in decision-making, a rarity in today’s economy of temporary, stratified, and low-paying jobs..

Another form of employee ownership is the employee stock ownership plan, or ESOP. With this arrangement, the stock of a corporation is put into a company retirement plan, and the shares are allocated among individual accounts for each participating employee. Thus, the employees are the shareholders of the company. While cooperatives pay taxes on their profits, ESOPs can have a significant business advantage because they are free from income taxes.