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Employee-Owned Companies Could Use a Government Nudge

When workers own the businesses where they work, the benefits can be broad and deep. But they don’t know how these plans work or how to set one up. That’s where state and local governments can help.

Denver, Colo., skyline with mountains in the background.
Denver, Colo., has become the most employee ownership-friendly state in the country.
States and localities spend tens of billions of dollars every year on tax and financing incentives to get companies to stay in place or relocate, often at a cost of many thousands of dollars per year per job. Much of the benefit is captured by the small number of wealthy people who own most of the equity in these companies, many of whom live elsewhere.

Yet every year, tens of thousands of privately held companies are up for sale. Some will be bought by local buyers, some will be bought by out-of-state investors or companies who may cut jobs or move operations, and some, even though profitable, will simply close their doors. A significant number of these could instead be passed on to the people who work for them, retaining the jobs — and the wealth — locally.

There are over 9,000 companies in the U.S. owned by some form of broad-based employee ownership plan, mostly through Employee Stock Ownership Plans (ESOPs) but some through worker cooperatives or other arrangements. These plans cover 14 million employees. The 100 largest majority ESOP-owned companies employ about 700,000 employees and include some of the most successful companies in their fields.

Research shows that these companies grow about 2.5 percent per year faster in sales and employment than they would have without employee ownership. Their employees end up with about 2.5 times the total retirement wealth, much of which will be spent locally. Depending on the year, these companies lay people off at a rate of one-third to one-fifth that of other companies. Employee ownership plans also provide much greater job stability and wealth building for people of color and women than other companies.

Federal tax law provides generous tax benefits for owners who use these plans for business transition. Companies fund the sale not out of employee money but the future tax-deductible profits the new owners help create. Support for these laws has been not just bipartisan but almost invariably unanimous.

State and local government can help create many more ESOPs through inexpensive programs already being pioneered in a number of places. The biggest barrier to the creation of more employee ownership companies is a lack of knowledge about how they work and why they can be appealing. State and local government can help solve the problem with low-cost outreach programs. Adding relatively small amounts of financial assistance can take the efforts one step further. These programs could retain large numbers of jobs, help generate additional job growth and create more local wealth at a tiny fraction of traditional economic development programs.

Hands down, Colorado has become the most employee ownership-friendly state in the country. In 2021, the state passed a law that would help cover up to 50 percent of up to $100,000 of the professional services fees to convert to employee ownership. In 2020, Colorado also created the Employee Ownership Office, a standalone center in the state’s Office of Economic Development and International Trade.

Just halfway through 2021, it had assisted with 20 transactions, a rate that would put Colorado far ahead of any other states in new employee ownership conversions per capita. The state office operates an “Employee Ownership Navigator” to provide advice to business owners about ownership models, as well as to connect them to local approved advisers. The state can also offer small loans to worker cooperatives.

Massachusetts pursued a different model, funding a local nonprofit to do outreach and technical assistance for employee ownership. A bipartisan effort in Texas to create a program to provide outreach and contract preferences for employee ownership in 2021 made significant progress in the Legislature but did not make it onto the state’s limited legislative calendar.

New York City; Durham, N.C.; Berkeley, Calif.; Madison, Wis.; and San Diego have all recently started city programs to provide information and technical assistance to companies considering employee ownership. Iowa and Missouri passed laws to provide tax incentives for sales to ESOPs.

These efforts are suggestive of the kinds of low-cost, high-impact programs that can be created. A rarity these days, employee ownership is equally supported by both parties. It’s capitalism for everyone.

Corey Rosen is the founder of the nonprofit National Center for Employee Ownership.

Governing’s opinion columns reflect the views of their authors and not necessarily those of Governing’s editors or management.
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