Are ESOPs right for California breweries?

Marc S. Schechter - Employee Benefits - Super Lawyers

Answered by: Marc S. Schechter

Butterfield Schechter LLP
San Diego, CA
Phone: 800-513-7210
Fax: 858-444-2345

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The San Diego area is renowned as the headquarters of more than 150 breweries, earning it the nickname of the “Craft Beer Capitol” of the U.S. However, while many brewery owners can explain the nuances of lautering and even wax poetic about fermentation techniques, they may feel out of their depth when it comes to employee ownership, ERISA compliance and related business law matters. That is why we are happy to provide a brief overview of employee stock ownership plans (ESOPs).

For many breweries, this unique type of retirement plan is indeed an excellent choice. In fact, numerous breweries nationwide have already transitioned to ESOPs — including Odell and New Belgium in Colorado, and the iconic Modern Times in San Diego.

The Basics Of ESOPs

As its name implies, an employee stock ownership plan is, when reduced to its simplest terms, a profit-sharing plan that allows the plan’s assets to be wholly invested in the sponsoring company’s own stock. The ESOP trustee manages the voting on company shares (with a few exceptions) until an employee retires or quits. At that point, the value of the vested shares allocated to the employee’s account can either be paid in cash (based upon their fair market value), or the company can buy them back.

How An ESOP Can Benefit Brewery Owners

For California brewery owners, the benefits of ESOPs are not merely theoretical. Rutgers University recently published a study showing that ESOP-owned companies tend to have better employee retention rates, higher productivity and greater overall stability. Plus, owners can benefit from:

  • Smooth, controlled transitions. ESOPs allow business owners to gradually and smoothly transition control to employee/shareholders while still maintaining a majority interest. This can ease a brewery owner’s concerns about retirement, knowing that the corporate culture that he or she worked so hard to achieve will continue. This may not happen with a brewery that is abruptly sold to new owners (especially if the buyer is a “big beer” corporation). Plus, utilizing an ESOP in business succession planning can potentially reduce broker costs and related expenses.
  • Tax savings. Many brewery owners appreciate the significant tax benefits that come with ESOPs. In most cases, employer contributions are tax-deductible up to 25 percent of payroll. In addition, if the owner takes the money from shares sold to the ESOP and reinvests the sales proceeds in qualified replacement property (QRP), he or she can defer capital gains taxes and, in some instances, totally avoid the payment of tax on the sale.

How An ESOP Can Benefit Employees

An ESOP can also provide certain benefits to brewery employees. For instance, participation in an ESOP can often:

  • Boost morale. It’s often more rewarding and motivating for employees to work for a company in which they may either share the profits or benefit from increase in value of their company’s shares.
  • Build loyalty. Because employees are vested in the company, they are more likely to feel connected and less likely to jump at a job offer from the competitor down the street.
  • Reduce taxes. ESOPs allow employees to avoid being taxed on the value of stock in their ESOP accounts until the distributions are actually made.

Deciding If An ESOP Is Right For You

If your business is just getting off the ground, you may wonder if an ESOP is appropriate right now. On the other hand, if your business is well-established and thriving, you may question whether the benefits outweigh the cost of implementing an employee ownership program.

No matter what your particular concerns may be, we welcome your inquiries. Our law firm, Butterfield Schechter LLP, is the largest employee benefits firm in San Diego County. Our attorneys bring more than eight decades of combined experience to the aid of businesses and business owners nationwide and have implemented hundreds of successful ESOP programs.

Disclaimer: The answer is intended to be for informational purposes only. It should not be relied on as legal advice, nor construed as a form of attorney-client relationship.

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