Accounting firms typically have multiple partners, some of whom may want to retire or move on in the near future, and others who want to stay longer.

Partners in accounting practices may plan to effect a buy-sell agreement, or some day sell to a larger competitor. But the hoped-for value may not be realized in a sale to a third party, or owners may ultimately not want their practice to be swallowed up into another firm's culture.

Partners who buy each other out, or have the practice do so, must use after-tax dollars to make the purchase. Similarly, redemptions of stock are not tax deductible. Some accounting firms are turning to another alternative: selling to employees through an employee stock ownership plan. These plans have long been used as a very attractive vehicle for ownership succession planning, and some accounting firms have been involved in consulting on them. But few have considered an ESOP for themselves or even realized that in 40 states an accounting firm could have an ESOP, provided it is a C or an S Corporation, or is willing to convert to one.

One common concern that accounting firms have is that their state laws do not allow accounting firms to have ESOPs. That was the norm some years ago, but today 40 states allow ESOPs for accounting firms. In Virginia and Minnesota, an ESOP can own 100 percent of the firm; in the other 38 states, the plan must own less than controlling interest.

State laws typically require that owners of accounting and other professional firms be members of that profession, but that problem can be resolved by having the trustee or trustees of the ESOP be accountants. ESOPs own stock through an employee benefit trust, not unlike a 401(k) trust, and the trust is run by a trustee or trustees appointed by the board. The trust, not the participants in it, is considered the legal owner of the shares, so having the trustee be an accountant satisfies state rules.

Firms should check with their state accountancy boards to get details. The trustee votes the shares, although companies can voluntarily pass that through to plan participants, and they must let plan participants provide direct voting on recapitalization, reclassification and sale of all or substantially all of the assets.

An ESOP was the route chosen by HLB Tautges Redpath, Ltd., based in St. Paul, Minn. As managing partner Jim Redpath tells the story, back in the early 2000s, when the founders were reaching their late 40s and early 50s, they were thinking about their future. "We didn't know what to do with what we had," he said.

They thought about selling to another, larger firm. "A lot of them wanted to buy us," said Redpath. "But, is this really us?"

They did some research and considered options. In 2003, the firm implemented an ESOP, and today HLB Tautges Redpath is 100-percent employee owned. Jim Redpath and the other partners are still there. They sold their ownership shares to the ESOP in 2003, and now they participate in the firm's growth and profits through the ESOP, just like other employees.

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