A bipartisan trio of senators has introduced legislation that would foster the growth of S corporations owned by Employee Stock Ownership Plans, or S-ESOPs.

Olympia Snowe

The bill, sponsored by Senators Ben Cardin, D-Md., Pat Roberts, R-Kan., and Olympia Snowe, R-Maine, is known as the Promotion and Expansion of Private Employee Ownership Act of 2011, or S. 1512. Similar legislation in the House was introduced earlier this year and so far has been endorsed by 18 Republicans and 18 Democrats.

The bill aims to eliminate the barriers faced by businesses and their owners when establishing a new S corporation ESOP or expanding the employee ownership stake in an S corporation.

“S-ESOPs have proven resilient even in tough times—hiring new workers as other firms were shrinking—while also providing an effective means of retirement savings for their workers,” Cardin said in a statement Wednesday. “We need to preserve and expand this structure to enable more businesses to grow and to allow their employees to accrue these valuable benefits. Americans deserve the opportunity to build secure retirement savings; far too many hard-working individuals are left with serious questions about their future economic security.”

The bill would permit owners of S corporation stock to sell the stock to an ESOP and defer the capital gains tax if the proceeds are reinvested in the equities of U.S. operating corporations, as owners of C corporations stock have been able to do under Section 1042 of the Tax Code since 1984. It would also establish an office in the Treasury Department to provide technical assistance to S corporations with ESOPs.

The bill would also provide protection for small businesses by ensuring that they would continue to qualify for the Small Business Administration’s loan, contracting assistance, or business development programs after they have converted to ESOPs. The technical change in the law would allow a business to maintain its status as minority-owned, woman-owned, veteran-owned, or otherwise qualify for specific programs within the SBA that are dependent on the nature of the ownership, if the company becomes owned 50 percent or more by an ESOP, and the workforce remains the same or nearly the same as before the establishment of the 50 percent ownership by employees through the ESOP.

“These types of positive incentives are an incredible motivator of employees, and in the face of looming tax reform, it is important for Congress to change these provisions now so they are not forgotten in larger tax reform or, worse, changed in some other, less favorable way,” said Snowe. “Implementing these reforms now will also afford small businesses and their employees a degree of certainty regarding their financial futures in what has been an extremely tumultuous economic environment.”