Selling to Your Employees through a Worker Cooperative – and Sheltering Your Capital Gain

by Eric D. Britton & Mark C. Stewart

INTRO: Since 1984, Federal tax law has permitted owners who sell 30% or more of the stock in their closely held company to their employees through a worker cooperative to get the same deferral of taxes on the capital gain on the proceeds of the sale as they would have received if they sold to their employees through an Employee Stock Ownership Plan. This is the so-called “1042 rollover” tax break. As far as we can determine, that provision has never been used for cooperatives – despite the fact that cooperatives can be set up economically in companies with far fewer employees than ESOPs.

About the author: Eric Britton and Mark Stewart are attorneys at Shumaker, Loop & Kendrick, LLP, in Toledo. Britton has a well-established ESOP practice and Stewart is Ohio’s leading expert on cooperative law.

Employee Cooperative as a Plan for Business Succession

by Mark Stewart

INTRO: Many small and medium size companies are the result of the enterprise, vision and lifetime work of one or a few individuals (the Owners). When an Owner grows older, he/she begins to have intimations of mortality and realize the need to plan for retirement and sale of the business. If the Owner would like to see the company continue with his or her vision intact, or if the most logical and desirable market for the company is some or all of the Owner’s closest business associates (the employees), the Owner may consider some form of employee acquisition of the company. This inter-generational transfer may be within the Owner’s family, in which case, the Owner may use traditional estate planning techniques. But many business Owners find that handing the business over to the next generation within the family is not an option. Even though the company’s corporate culture may be like a “family”, the next generation who will succeed the Owner may not be members of the Owner’s family. In this case, the Owner and the Owner’s heirs (or charitable beneficiaries, if the Owner has no children) will expect to extract full value upon transfer of the company. This means a sale/purchase agreement with a plan for the ongoing organization and capitalization of the company.

About the author: Mark Stewartis a partner in Shumaker, Loop & Kendrick, LLP, a law firm with offices in Toledo and Columbus, Ohio, Tampa, Florida, and Charlotte, North Carolina. Mr. Stewart’s primary practice emphasis is on matters of cooperative law and taxation.