Typically owned and operated by one or two founding principals, A&E firms eventually reach a point where their leaders must consider succession planning as they approach retirement. Employee Stock Ownership Plans (ESOPs) can help facilitate succession planning while offering special advantages for owners and employees of architecture and engineering firms, including significant tax benefits. Learn more about the benefits of an ESOP and discover why you should consider one for your A&E firm.
What is an ESOP?
An Employee Stock Ownership Plan (ESOP) is a special kind of benefit that makes it possible for workers to earn an ownership stake in the company. The ESOP came into use as a result of the 1974 Employee Retirement Income Security Act (ERISA). Typically formed with succession planning in mind, ESOPS help ensure employee and shareholder interests are aligned.
Why should A&E firms consider an ESOP?
Many architecture and engineering firms started out with one or two founding principals who forged a reputation for themselves in a particular discipline. As founders approach (or begin to plan for) retirement, two of the biggest issues they can face are concentration of ownership and succession planning. There are multiple reasons for this:
- They want to preserve the viability of the firm after they exit
- They’re concerned with retaining top talent that attracts desirable clients
- They want the firm to have an enduring legacy in the industry and their community
Concentration of ownership and succession planning can be overlapping concerns. Top discipline leaders who may be professionally ready to assume ownership responsibilities may not have the financial resources to buy out an exiting principal. An ESOP can help owners not only groom and motivate high-potential successors, but also prepare them financially to step into an ownership role when the time comes.
What are the advantages of an ESOP for A&E firms?
While not every A&E firm has an ESOP, a growing number of them are taking advantage of the benefits they offer for employees and owners alike. There are many compelling reasons to consider setting up an Employee Stock Ownership Plan for your firm. Here are seven of them:
- A chance for an ownership stake helps attract and retain top talent
- Employee ownership can be a powerful culture and brand differentiator
- Clients may perceive employee owners as more committed to delivering value
- Ownership helps to promote company-wide commitment to the firm’s goals
- The firm and its owners may realize significant tax benefits from an ESOP
- The potential “switching cost” for employee-owners may reduce competitor poaching
- Unique attributes of an ESOP can be an attractive alternative to M&A opportunities
Apart from all the cultural advantages of an ESOP, the tax considerations alone are worth a closer look. There are many layers to the ways that a properly structured and deployed ESOP can help you improve the overall financial health of your firm.
Of course, employee ownership plans are not a one-size-fits-all consideration for every firm. You’ll want to have a conversation with an ESOP specialist to explore your specific tax considerations and other local regulatory issues such as licensure requirements related to professional service organization ownership.
Continuing the conversation
If you need support with the tax and accounting aspects of ESOPs, we can help. Contact us today to learn more. We look forward to speaking with you soon.
