Are you a business owner who has considered an employee stock ownership plan (ESOP) or similar structure as a succession solution for your Colorado-headquartered business? Are you also concerned that the ESOP formation costs will be prohibitive?
Fortunately, Colorado Governor Jared Polis is a former entrepreneur and has long been a supporter of employee ownership. One of the governor’s initiatives was to form the Colorado Employee Ownership Office (CEOO), which spearheaded legislation creating substantial benefits, outlined below, for Colorado businesses moving to employee ownership.
CEOO Background
Converting to an ESOP offers many advantages for owners as well as employees no matter where you are located. But as a Colorado business owner, you enjoy additional benefits. Colorado was the first state to pass legislation to help companies like yours cover ESOP conversion costs, and while other states have since followed suit — after all, employee ownership enjoys bipartisan support nationally — Colorado still offers the highest level of incentives and remains the national model for providing resources to expand employee ownership.
That support flows from the CEOO, a division of the Colorado Office of Economic Development & International Trade (OEDIT). You can also look to the Colorado Employee Ownership Commission, which was established in April 2019 by executive order to support the CEOO. Their goal is to make employee ownership more accessible to business owners, thereby expanding employee ownership in Colorado.
If you are considering an ESOP or similar structure, you can contact the CEOO for information and advice and to obtain funding. You will want to consider your options among various forms of available funds, including tax credits, ownership grants, and certain levels of financing. Eligible employee ownership structures include, but are not limited to, ESOPs, employee ownership trusts, and employee stock purchase plans. For more information on programs, eligibility, and funding, please visit the CEOO website.
Colorado Employee Ownership Tax Credit
As the owner of a business headquartered in Colorado, you may remember that in June 2021, Governor Polis signed into law the Employee Ownership Tax Credit bill, C.R.S. 39-22-542, which made employee ownership conversions more accessible. Conditions became even more favorable this past May, when the governor signed HB 23-1081 into law. This expansion bill increased the tax credit amounts and eligibility criteria.
There are many benefits available through the CEOO, but we will focus here on the Employee Ownership Tax Credit specific to ESOPs, which provides the highest level of incentives. Key elements of this program include the following:
- The program provides $10 million in annual tax credits to fund professional service costs incurred as the result of conversion to employee ownership.
- Includes the cost of accounting, business valuation, legal and advisory services
- The initial conversion must result in an entity with at least 20% employee ownership.
- Covers up to 50% of initial ESOP conversion costs, up to a cap of $150,000, to be claimed as a credit on the Colorado income tax return.
- After January 1, 2024, a tax credit will be available for 50% of conversion costs, up to cap of $25,000, for existing ESOPs that expand employee ownership by at least 20%.
- These tax credits are available until December 31, 2033.
- Qualified business must be headquartered in Colorado and have existed for at least one year.
- Business must apply for the tax credit before the completion of the employee ownership conversion.
General ESOP Advantages
Has the availability of a $150,000 tax credit grabbed your attention but left you still unsure whether an ESOP is the right fit for your business succession plan? Let’s briefly discuss the benefits of an ESOP at a high level. An ESOP can provide many benefits, to you and all parties, compared with other succession strategies (e.g., strategic buyer or financial buyer):
Shareholder
- Guaranteed stock sale at fair market value to a willing and friendly buyer
- Significant tax advantages (potentially permanent capital gains tax deferral)
- The ability to retain effective control of the company
Company
- Significant tax advantages
- Possibility of federal tax-exempt status as an ESOP-owned company
- Tax-deductible ESOP debt service and annual ESOP contributions
- Preservation of existing management team and company culture
- Stronger company growth and employee productivity, fueled by vested interest
- Employees likely to think and act like owners
- Better employee retention and recruitment of new employees
Employees
- Partial ownership of the company with no personal cash outlay
- Participation in the success of the company
- Stronger motivation due to ownership
Learn more about ESOPs.
PCE Is Here to Help
The advisors at PCE are experts at ESOP formation and in providing ongoing advisory services. We view ESOP education as a top priority and would be happy to answer any questions you may have (which can include giving you a preliminary idea of your company’s valuation and liquidity).
PCE can also assist with the OEDIT application process to ensure that your company maximizes the benefits offered to Colorado-headquartered businesses looking to transition to employee ownership.
If you are considering an ESOP as a succession solution for your business, please contact us today.
