Policy Recommendations

Business transfers

Internationally, the most significant short-term vehicle for democratic employee ownership is the transfer of existing businesses (CECOP 2013). This strategy is viewed as important for retaining quality jobs and entrepreneurial capital. In addition, successful business transfers create stronger opportunities for job growth than start-ups. Challenges include the lack of knowledge about business transfers among professionals, such as lawyers, accountants, and estate managers. Opportunities include the ability to leverage existing federal tax benefits, such as the IRC § 1042 “rollover” of capital gains tax.

NYS Center for Democratic Employee Ownership

NYS should allocate funding for the existing NY Economic Development Law § 104-a, which provides resources for a Center for Democratic Employee Ownership that would promote awareness of business transfers among employers—and provide support to professionals engaged in estate management. This center would professionally market the availability of federal and, ideally, state capital gains exclusions available to selling and/or retiring business owners. If additional funding were made available, the center would offer “matching grants” to employers for accounting, legal, and business planning expenses related to the sale, as in Iowa. Center staff would provide professional trainings to lawyers, accountants, and estate planners on technical aspects of federal, state, and city tax code—and make referrals for specialized employee education and financial services. Finally, as an agency of the State of New York, the NYS Center for Democratic Employee Ownership would continue to add credibility and legitimacy to the practice of business transfers—and, as appropriate, ease barriers for high-value business transfers.

Notably, the Ohio Employee Ownership Center (OEOC) was founded in 1987 and is responsible for assisting “employees in buying all or part of 92 companies, creating 15,000 employee-owners, at a cost in state funding of $772 per job created or retained” (NCEO n.d.). State centers also currently exist in Colorado, California, and Vermont.

“Employee Ownership Assistance” loan program

NY Public Authorities Law § 1836 provides for loans from local development corporations to intermediary organizations for the purpose of transitioning existing businesses into employee-owned enterprises. NYS should designate funding for this program. Presently, “no such loan may exceed forty percent of the cost of the project and the repayment of such loan shall be secured by a mortgage thereon which shall not be a junior encumbrance thereon by more than fifty percent of such cost, and by means of the guarantees of the loans made by banking organizations which guaranty shall not exceed eighty percent of the cost of the project.”

“Employer specific skill training grant program”

NY Education Law § 3032(4)(a) provides “training to individuals to promote the successful management and/or operation of a business purchased by such individuals to provide for their continued employment through the formation of a worker owned cooperative or an employee stock ownership plan. No grant shall exceed fifty per centum of the total program cost. Eligible program cost may include employer wages paid to the employee for time spent in the training program.”

The State of New York could reauthorize these funds in the state’s annual budget. Additionally, the training grant program would expand to include “D” corporations not resulting from business transfers.


Expand NY TAX § 999-A, § 2055(a)(5) to qualify bequests to democratic firms as charitable (i.e., deductible) in calculating a decedent’s taxable estate.

Partial Interest Income Deduction

Leverage an existing federal tax policy by providing for a 50% exclusion of interest received by a bank or loan fund on a loan to a democratic firm.

Capital Gains Tax Exemption

The proposed capital gains tax exemption would leverage existing federal tax benefits with state capital gains exemption for the transfer of a business to employee-owned enterprises in accordance with NYS Public Authorities Law § 1836(b)(5). In short, a business owner who sells a majority of a firm’s voting shares to an employee-owned enterprise qualifies for full exemption of state capital gains taxes. Of course, NYC-based businesses would receive the maximum benefit available in the United States—with a combined city and state capital gains tax of approximately 14%. Owners would still have the option of “rolling over” the remaining sale proceeds to defer, possibly permanently, the 20% federal capital gains tax.

This rule has precedent in the 2012 Iowa Acts House File 2465 “Capital Gain Deduction for Sale of Stock to an Iowa ESOP” which exempts 50% of proceeds from sale to an ESOP. Iowa also sets aside $500,000 annually to provide “cash grants to companies facing accounting, tax and legal bills during the exploratory phase of starting an ESOP, upfront costs that can sometimes daunt and deter” owners from considering the option (Hubbard 2013).

The New Jersey legislature is considering a similar bill as proposed by Rutgers University Professors Joseph Blasi and Douglas Kruse. NJ Assembly Bill 2911 would exempt 100% of capital gains taxes on sale proceeds (NCEO 2014).

Structural Protections

Democratic, employee-owned firms require an adequate legal framework in which to operate. In particular, international bodies such as CICOPA (2012) and the International Cooperative Alliance recognize the need for “indivisible reserves”—a portion of untaxed retained earnings that exists for the benefit of the firm, its workers, and the broader community. As currently instituted in Germany, France, Italy, Spain, and Quebec, indivisible reserves act to 1) protect democratic businesses as intergenerational institutions by deterring their sale; 2) recycle protected assets into the community upon dissolution; and 3) promote reinvestment in democratic firms to grow jobs and stabilize income (Reynolds 2013).

Exemption on Indivisible Reserves

The state would exempt corporate tax on earnings retained by democratic firms—with a mandatory minimum allocation to an indivisible reserve account for access to the benefit. This benefit would leverage existing federal tax policy under IRC § 521 that exempts firms from taxation on worker-member profits or “patronage.” Indivisible reserves may only be reinvested in the firm, e.g., research and development, equipment/land purchase, capitalization. On dissolution, indivisible assets are recycled to the municipality for further reinvestment in democratic, employee-owned firms.

“D” Corporation Tax Status

A new “D” corporation tax designation would enable all democratic firms to apply the above benefit, including worker-owned limited liability companies, “C” and “S” corporations, as well as democratic ESOP companies, and worker cooperative corporations. Democratic not-for-profit corporations would employ this tax designation for non-tax purposes. Finally, this tax designation would closely mirror IRC § 1042’s definition of an eligible worker-owned cooperative (EWOC) in requiring a majority of the voting shares to be owned by employees on a “one worker, one vote” basis.


General Municipal Law

Under NY General Municipal Law § 103, public contracts must be awarded to the lowest competitive bidder, or in certain cases on the basis of “best value.” NYS would create a new “carve out” for democratic firms as preferred contractors for public contracts. This practice has a long and successful history of building community wealth in countries like Italy and France. This rule might be introduced as an amendment to State Finance Law § 162; or under the Executive Law, e.g., Article 17-B.
annual report

The state would produce an annual report on the volume of contracts allocated to democratic firms. The report would include an analysis of barriers or challenges faced by democratic firms in accessing state contracts and/or engaging with NYS’s procurement system.

M/WBE Certification

Certification of a minority- or woman-owned business under NYS is limited to businesses with less than 300 employees. Although a reasonable requirement in the case of traditional closely held firms, this rule discourages large-scale minority-owned and – operated businesses. For example, Cooperative Home Care Associates (CHCA) is entering its 30th year in the home health care industry with more than 2500 mostly female and Latina employee-owners. A business like CHCA should be rewarded for expanding ownership among minority and women workers.

Jobs funding

Growing support exists for transitional jobs funding as a pathway to employment for challenged individuals (NTJN 2012). A transitional jobs program typically subsidizes a company with up to six months of salary for hard-to-employ individuals. Although termed a “transitional” job program, the strategy aims to create stable employment for challenged individuals. A six-month “transitional” subsidy acts as a buffer that allows employers the time to train and stabilize new hires within the workplace. If allocated to “D” corporations, these funds would leverage an employee culture, ethical commitment, and incentive system that emphasize secure and high-quality employment for fellow co- workers.


European Confederation of Cooperatives in Industry and Services (CECOP). 2012. “CECOP answer to the European Commission consultation Entrepreneurship 2020 Action Plan.” Brussels: CECOP-CICOPA Europe.

Hubbard, Russell. 2013. “Iowa’s ESOP Success is Getting Nebraska’s Attention.” Omaha World-Herald. November 21.

International Organisation of Industrial and Service Cooperatives (CICOPA). 2013. “Policy Recommendations Following the 2012 International Year of Cooperatives: For More Worker and Social Cooperatives in the World!” Brussels: CICOPA.

National Center for Employee Ownership (NCEO). 2014. “New Jersey Bill Would Encourage Employee Ownership.” August 1. http://www.nceo.org/employee- ownership-update/2014-08-01 (October 14, 2014).

———. n.d. “Business Retention Through Employee Ownership: Resources for Economic Development Agencies.” Oakland: NCEO.

National Transitional Jobs Network (NTJN). 2012. “Efficacy of Transitional Jobs: A Summary of Findings from Random Assignment Control Group Studies and Program Evaluation.” Chicago: NTJN.

Reynolds, Bruce J. 2013. “Indivisible Reserves: Some See Unallocated Equity as a Way Co-ops Can Help Fortify Their Future.” 80 Rural Cooperatives 3. Washington, DC: USDA Rural Development.