Proposed Legislation Favorable to S Corp ESOPs

Posted · Add Comment

In a move that is pro employee ownership and positive for business, as well, lawmakers in both the House and Senate have recently re-introduced legislation to encourage the creation of employee stock ownership plans (ESOPs) in S Corporations. For some time, certain provisions in the ESOP rules have favored conversions of businesses operating as subchapter C corporations under the Internal Revenue Code. The expectation is that any new legislation will expand those provisions favoring just C corporations to apply to S corporations as well.

Senator Ben Cardin, a Democrat from Maryland, serving on the Senate Finance Committee, last week introduced S. 1212. The proposed legislation in the Senate would amend the Internal Revenue Code of 1986 and the Small Business Act to expand the availability of employee stock ownership plans in S corporations (also known as S ESOPs) in America. The bill was co-sponsored by 13 other senators in a bi-partisan effort intended to show Senate support for employee ownership in the United States. Cardin introduced similar legislation in the Senate in 2013 during the previous congressional term.

The proposed Senate bill follows on the introduction of a similar bill in the House of Representatives. H.R. 2096, the Promotion and Expansion of Private Employee Ownership Act of 2015, was introduced on April 29 by Rep. David G. Reichert, R-Wash., and Ron Kind, D-Wis.

The House bill includes provisions to encourage owners of S Corporations to sell their stock to an ESOP, expand financing opportunities for S Corporation ESOPs, provide technical assistance for companies that may be interested in forming an S Corporation ESOP, and ensure that small businesses that become ESOPs retain their Small Business Association certification.

Both the ESOP Association, a national ESOP trade group located in Washington, D.C., as well as the National Center for Employee Ownership, located in Oakland, California, have supported past introductions of similar legislation and are fully behind the recent legislative proposals.

“Needless to say, it is extremely pleasing to see these Senate leaders, representing bi-partisanship, stand up for employee stock ownership through ESOPs,” ESOP Association president, J. Michael Keeling said in a statement Monday.

“The ESOP Association notes its appreciation for these members who have joined in support of employee ownership and taken the lead to address issues that relate to increasing ownership shares among average pay Americans. Research proves that ESOPs are more profitable, more productive, and provide sustainable jobs. We need policies to encourage employee stock ownership, and the proposed policies in S. 1212, should address core social issues such as adequate retirement security and making sure working Americans have an ownership stake in our capitalistic system,” noted Keeling.

Through many sources, employee ownership has been shown to significantly increase company performance while offering owners a means of accomplishing a plan of business succession or asset diversification in an economically beneficial manner. Clearly, it is time to move more of the favorable provisions to companies organized as S corporations so that more companies, and their ownership groups can take advantage of this planning opportunity. The best thing about an ESOPs is that, structured properly and in the right circumstances, there are substantial benefits for not just the ownership group, but also the employee group and the company, itself.

The bill is not yet reported on the Senate’s website but should be listed in its entirety in the next few days.

Should you have questions, please contact Bob Grossman at 412.338.9304.