Sharing Ownership, Part 2: The ESOP or the Co-op—Which Way to Go?

November 2008
by John Abrams

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Sharing Ownership, Part 2: The ESOP or the Co-op—Which Way to Go?

by John Abrams

Among small and medium-size businesses considering employee ownership, one of the most common questions is: Which makes more sense, the ESOP or the co-op? In Part 1 of this series—“Sharing Ownership: A Succession Strategy Proves Out” (October)—I mentioned that most employee-owned companies are ESOPs, but more companies are exploring and choosing the cooperative alternative.

As an employee-ownership consultant with the ICA Group in Boston, Jim Megson did comparisons to analyze the benefits and drawbacks of each option. The specifics will vary, but here is an adaptation of his summary report for one company.

Sale to a Worker Cooperative

Advantages:

relatively inexpensive to set up

no annual maintenance fees

can use IRS 1042 rollover to defer capital gains under certain conditions

owner can retain oversight until note is paid off

members buy a membership share, which makes ownership “real”

democratic structure involves all employees

shares can be held only by employees

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