More Design Firms Put Stock in Employees

The number of A/E/P firms embracing employee stock ownership plans (ESOPs) is growing, according to an annual survey by ZweigWhite, a Natick, Mass.-based management consulting firm. The percentage of firms that offer ESOPs has increased from 17% in 2002 to 26% in 2004. Although ESOPs have been around for more than 30 years, they've only recently gained in popularity, due in part to recent legislation. Changes to the tax code that took effect in 1998 made ESOPS available to companies with S-corp status, a popular tax structure among smaller firms. In addition, many A/E/P firms employ less than 100 employees and are still owned and operated by their first-generation owners, who may be nearing retirement. These firms can employ ESOPs as a tool to manage major stock redemptions. They can also benefit from such tax advantages as deducting the principal portion of ESOP debt and redemption of shares through contributions to the ESOP plan. By selling their shares to the ESOP, sellers can defer the capital gains tax on the sale under certain conditions. Before making the decision to use ESOPs, however, ZweigWhite advises firms to carefully consider factors like firm size, cash flow, debt service capacity, and corporate culture.