Engineering firms make up a sizable portion of organizations that have opted for the employee stock ownership plan (ESOP) structure. According to the National Center for Employee Ownership (NCEO), 17 out of the 100 biggest employee-owned companies were A&E (architecture and engineering) firms in 2020.
So why is it such a successful model in this industry? Let’s examine ESOPs’ meaning and why it adds so much value to an engineering firm.
Upholding Culture and Reputation
A&E companies are often started by a small group of professionals who establish a name and set of guiding principles that become synonymous with them. One of their key goals as the original stockholders about to retire is maintaining its historic local reputation. A typical outside sale creates a considerable risk to the founders’ legacy.
For instance, a strategic buyer can have a completely different culture to the detriment of the current workforce. In contrast, a financial buyer might be motivated to achieve a particular return and, as a result, try to minimize costs and other fringe perks. ESOPs can also give stockholders a flexible way to sell their shares at a fair price while maintaining the company’s history and culture.
Maintaining a consistent culture that allows individual engineers to flourish benefits the firm and the employees – innovation can thrive while staff enjoys greater security than at a non-ESOP engineering firm.
The use of ESOPs can result in several tax advantages, including:
- Capital gains tax may sometimes be deferred if the business is sold
- The company’s income tax burden might be substantially cut
- ESOP contributions may be deductible
- Employees’ retirement schemes could be eligible for tax deference
According to the IRC, capital gains tax can sometimes be infinitely deferred if the company continues to work as a C Corp. Meanwhile, if the ESOP-owned company is an S Corp after the sale, associated revenue from the shares automatically moves to a tax-exempt retirement plan – similarly avoiding unnecessary taxation.
This benefits shareholders and the company equally. The company benefits from improved cash flow while the shareholders enjoy tax-exempt retirement income. Engineers frequently value the long-term stability and forward planning associated with ESOPs meaning they remain prevalent in the sector.
A&E specialists are in great demand because there is a persistent problem with a lack of skilled talent in the industry. Because of this demand, rival companies often entice top employees away by promising higher pay and better perks.
ESOPs are a powerful tool for luring and keeping employees, and it offers professionals – especially those with the most extended tenure – value year after year. Before leaving one company to work for another, an employee who participates in an ESOP must weigh the switching cost. The ESOP virtually always comes out on top, as these companies typically have more integrated working cultures and offer more stable rewards.
Get Onboard the Winning Team
Because T.R. Arnold & Associates has no sole proprietor, the staff members have equity in the business and are eligible for profit-sharing bonuses. Employees also receive numerous ESOP company perks.
Apply to work for T.R. Arnold to enjoy these benefits and more.