ESOPs, B Corps and Benefit Corps and Employee Ownership

ESOPs, B Corps and Benefit Corps and Employee Ownership

Employee owned businesses are not new concepts; many exit plans for small business owners have included having the workers buy-out the owner.  From an employee perspective, a worker or employee-owned business abounds with benefits, with workers enjoying:

  • higher than average wage
  • a democratic say in their business practices
  • wholesale investiture in their own skill development

Transforming a company into an employee owned business can be done in a number of different ways, but the most common practice is for a company to have an Employee Stock Ownership Program (ESOP). An ESOP is an employee benefit program that gives a company’s workers an ownership stake in the business in the form of employer stock.

Another way to create worker ownership is to convert the business into either a B Corp or a benefit corporation.  This approach would allow a company to engage in traditional commercial strategies while attempting to improve the human or environmental condition.  B Corp is a certification — known as “B Certification” — and is done by an independent nonprofit known as B Lab, which evaluates businesses using a point system in four categories: governance, workers, community and environment. Companies that can achieve a minimum score of 80 out of 200 points can certified as a “B Corp” and must undergo recertification every two years.  Another, more permanent option, is for the would-be worker owned business to become a benefit corporation, which a specific entity form that has both a business purpose and a social purpose. Using the benefit corporation approach, the would-be worker owned business would commit in its formation documents to worker ownership and the tenants that accompany this concept.

These options all share a core value: employee welfare. Because of this link, it is logical that companies that are more worker-minded might also be interested in the other aspects of social enterprise; a B Corp or benefit corporation might be interested in becoming an ESOP and vice versa. This is not just a logical conclusion—it also makes good business sense.

Take the benefit corporation. For shareholders of privately held benefit corporations, transitioning into an ESOP allows a company to protect its particular values by keeping ownership within the organization—which maintains organizational independence. It also prevents the restructuring and layoffs that might come with selling shares to a private equity firm or some other buyer and enhances cash flow through the tax-deductible nature of the loan that ESOPs use to purchase stock. Becoming an ESOP can enhance a benefit corporation’s commitment to its employee’s welfare, community development and democratic governance practices

The ESOP, too, benefits from becoming a benefit corporation or a B Corp. The B Corp certification or the benefit corporation status protects an ESOP employee’s ownership stake by encouraging the company to reach and maintain certain ownership and governance goals and can help draw in talented workers that adhere to the company’s values. In addition, becoming a B Corp or a benefit corporation can give an organization competitive advantage over non-certified companies by generating positive media exposure, cultivating a loyal customer base, and, in some cases, even commanding a pricing premium for goods and services from more discerning consumers.

ESOPS and benefit corporations are likeminded entities that share a number of important values. Each one is already well equipped with the necessary qualifications to transition into the other—and it’s a marriage of values that just makes sense. So, hop on the bandwagon, engage in those newfangled trends, and make the world a better place: one employee-owned benefit corporation at a time.


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Kimberly Lowe

Kimberly Lowe

For over 20 years I have lawyered from the trenches with experience based on a comprehensive knowledge and understanding of how both for-profit and nonprofit enterprises operate. I guide entrepreneurs, executive management teams, boards of directors, multigenerational families, shareholders and investors through all aspects of the business life cycle from formation to operation to exit. Read Kim's Bio.

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