The City of Newark, under the leadership of Mayor Ras J. Baraka, is implementing the development of employee-owned businesses as a community wealth-building strategy. Our employee ownership initiative is designed to change the economic landscape for residents of Newark, NJ through the conversion of existing businesses to employee ownership. Historically, employee-owned businesses have served as a powerful tool for addressing economic inequality by providing employees with better working conditions and the potential to increase family wealth. According to the National Center for Employee Ownership, “employee-owners were four times less likely to be laid off during the recent recession” and employees at employee-owned businesses have “2.5 times greater retirement accounts than equivalent employees elsewhere” (www.esopinfo.org/infographics). In addition, employee-owned companies experience “25% higher job growth than comparable companies.” The standard structure for employee ownership in the United States is an employee stock ownership plan (ESOP), which is regulated under federal law to protect employee assets and enjoys substantial tax benefits.
Benefits for Business Owners
Business owners will receive cash at the time of sale. They will avoid the cost of business broker fees that can range up to 10% of company value. If the business is a C-Corp, or converted to a C-Corp, the seller can defer the capital gains tax on any sale proceeds reinvested in domestic securities, e.g., an indexed mutual fund matching the S&P 500 (www.nceo.org/articles/esop-tax-incentives-contribution-limits). If the sale proceeds are reinvested until death, then no capital gains tax is paid and the transaction becomes tax-exempt. The seller has the option of taking any portion of the sale price as a note at mezzanine-like rates (e.g., 20-30%). The sale will occur on the timeline, and at the convenience of, the seller. It is strongly in the interest of Newark CEDC and the future employee-owned business for the seller, family members, and executive managers to remain with the company as long as possible. To this end, Newark CEDC will seek to provide healthy employment agreements for all such individuals. Finally, the program offers sellers an opportunity to preserve their legacy in Newark.
Download further information on the program here: Initiative Overview
See this recent article in the Harvard Business Review on employee ownership.
Prior to joining Newark CEDC, Chris was general counsel and policy director at the oldest U.S. nonprofit dedicated to employee ownership. He currently also serves as senior adviser to the Rutgers-based NY/NJ Center for Employee Ownership and is associate faculty at the Rutgers School of Management and Labor Relations. Chris is a frequent speaker on employee ownership and has published articles on the topic in leading peer-reviewed law journals, including Tax Notes and Probate & Property. He is a member of the National Center for Employee Ownership and the ESOP Association, serves on the advisory board of CertifiedEO, and is active in legislative campaigns supporting employee ownership. Chris is licensed to practice law in New York, New Jersey, District of Columbia, and Minnesota. He earned a BA at Columbia University and a JD/PhD at CUNY.
Christopher Michael, J.D., Ph.D.
Director of Employee Ownership