One goal for a lot of social entrepreneurs is for business ownership to be held by as many people as possible.
But that’s tricky for many reasons. Take the matter of financing. Funding inclusive models, as they’re called, is different from financing the usual suspects, that is, companies owned by the few that aim to maximize financial returns only.
“It’s not necessarily harder, but it seems harder, because it’s different,” says Majorie Kelly, executive vice president and senior fellow at The Democracy Collaborative. In other words, funders need a greater comfort level with these models before they dole out the money.
An employee at New Belgium Brewing (Photo: New Belgium Brewing)
With that in mind, Democracy Collaborative recently published a report examining a variety of ownership models and ways to finance them. Here’s a look at a few, along with some innovative financing approaches
Employee stock ownership plans (ESOPs). Through this model, entrepreneurs sell ownership in their company to their employees. ESOP shares are held in trust, and the number of shares can vary among employees. It basically serves as a retirement plan: Employees cash out either when they retire or when they leave the company. Also companies can be partially or completely employee owned. Or, they can follow the path of New Belgium Brewing in Fort Collins, Col., which started out as a partially owned ESOP in 2000 and moved to 100% ownership 12 years later.
Traditionally, ESOP financing has relied on a combination of commercial borrowing and seller financing, among other methods. But one innovative approach involves the U.S. Small Business Administration’s (SBA) Small Business Investment Company (SBIC) program. According to the report, it licenses private investment funds as SBICs and “these funds then use their own capital plus funds borrowed with an SBA guarantee to invest in qualifying small businesses. “ A few private equity firms now use SBICs to finance leveraged ESOP transactions. Another move: Some state employee ownership centers operate revolving loan funds.
ESOPs also offer some tax advantages. First of all, both principal and interest on a sale to an ESOP are tax deductible. In addition, owners selling at least 30% to an ESOP can defer capital gains taxes if they invest the money in another U.S. company. Plus S corporations that are 100% owned by an ESOP trust pay no corporate income tax.
Worker cooperatives. With this model, ownership is in employees’ hands, with a one member, one share, one vote system. One innovative financing approach is to raise donations for new members who can’t afford the fee. Others include devoting a portion of profits to funds for growth, selling shares with limited voting rights and doing a direct public offering (DPO). Also, over the past two years or so, foundations have stepped up their support of cooperatives. For example, in 2014, the W.K. Kellogg Foundation gave a $225,000 grant to the Center for Community Based Enterprise in Detroit to “assist low-moderate-income Detroit residents in generating jobs with worker equity,” according to the report.
Hybrid and social enterprises. Basically, these two categories include double bottom line companies, benefit corporations (corporations with a legal structure protecting a financial and non-financial mission), and L3Cs, or, limited liability companies with a social mission. One novel financing approach: A small number of municipalities are working on ways to help fund companies registered as benefit corporations. In 2009, Philadelphia, Pa., for example, introduced a sustainable business tax credit for such enterprises.
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