State Legislation on Employee Ownership

The proposed bills listed here are not a comprehensive list. Instead, we have selected those proposals that have garnered significant support and provide useful models for advocates.

Passed legislation

Comprehensive State Laws

California

In September of 2022, Governor Gavin Newsom signed the California Employee Ownership Act. Both houses approved the bill unanimously. A broader version of the bill previously passed the Senate, but the bill was pared down in the Assembly. The Senate agreed to the pared down version with the understanding that an effort will be made to add the deleted features in the governor's next budget proposal.

The bill establishes the California Employee Ownership Hub within the California Office of Small Business. The Hub will work to “increase awareness and understanding of employee ownership among stakeholders, assist business owners and employees in navigating available resources, and streamline and reduce barriers to employee ownership.” California has a variety of loan support programs that companies seeking to convert to employee ownership could potentially qualify for.

The bill applies to worker cooperatives, ESOPs, and employee ownership trusts. Specifically, the bill directs the Hub to “partner with relevant private, nonprofit, and public organizations including, but not limited to, professional and trade associations, financial institutions, labor unions, worker centers, Small Business Development Centers, economic and workforce development organizations, and nonprofit entities” to provide education and outreach on employee ownership. It also directs the office to set up a referral service model and to work with the various business development loan and grant programs in the state to make it “enhance the ability of broad-based employee ownership vehicles to access California capital programs.”

The deleted language of the bill called on the state to:

• Appropriate funds to make grants to qualified nonprofits to provide outreach and education programs on employee ownership in the state;
• Provide grants of up to $50,000 per company to pay for up to 50% of the cost of conducting feasibility assessments for employee ownership transitions.
• Direct the Program Manager to “work with all California state agencies whose regulations and programs affect employee-owned companies, and businesses with the potential to become employee owned, to enhance opportunities and reduce barriers.”
• Direct the Program to “work with the California Infrastructure and Economic Development Bank, the California Pollution Control Financing Authority, and related entities to shape and implement guidance on lending to broad-based employee ownership vehicles.” This could result in these agencies making loans or loan guarantees for ESOP transition (the Pollution Control Financing Authority has a very broad scope that possibly could include such loans).

The California Senate passed the bill in the summer of 2022 by a unanimous vote. In the Assembly, concerns about the budget impact delaying passage, the bill was amended to leave only the now renamed California Employee Ownership Hub within the California Office of Small Business. 

The 2023, 2024, and 2025 California budget did not include funding for this program so its future is uncertain.

Colorado

In 2019 and 2020, Colorado Governor Jared Polis established the Employee Ownership Commission and Employee Ownership Office, respectively, housed within the Colorado Office of Economic Development and International Trade (OEDIT). Through Executive Order B 2019 005, the Commission creates a statewide network of technical support, educational programs for business and communities, and increased accessibility to employee-owned business structures. In addition to the support of the Commission, the office has its own dedicated staff. The office was allocated $1.75 million in funding to advance employee ownership initiatives throughout Colorado.

The office offers programming, funding, and resources for businesses interested in becoming employee-owned. In 2021, H.B. 21-1311 established the Employee Ownership Tax Credit, providing $10 million annually in tax credits to fund professional service costs incurred when converting to employee ownership. The office also offers the Employee Ownership Grant, awarding $3,000 to businesses to reimburse conversion costs. See details of the tax credit in the section below on tax incentives.

In addition to funding, the office launched three peer networks for Colorado’s current and aspiring worker cooperatives, ESOPs, and ESOP communications committees. The office also offers a new certification for companies that provide ownership to employees at a level of 20% or more. The companies are included in statewide branding campaigns and are listed on its website on the Colorado Employee Owned Company Map.

The office will operate an “Employee Ownership Navigator” to provide advice to business owners about ownership models, assist with business succession planning, as well as connecting them to local technical assistance and service providers by conducting one-on-one consulting sessions with approved advisors.

Finally, the office will offer a loan program to support employee ownership conversions or existing business sales to employees. Bills HB17-1214 and HB21-1241, called on OEDIT to establish and administer a revolving loan program targeted toward worker-owned cooperatives or ESOPs. The program uses funds from the State Small Business Credit Initiative, deployed through the Cash Collateral Support program, and managed by the Colorado Housing and Finance Authority (CHAFA).

In 2024, the state expanded the tax credit program so that 50 percent of the costs of setting up an employee ownership plan can be claimed as a tax credit. The tax credit limit is $50,000. .Up to $25,000 can be claimed for expanding an existing employee ownership plan by at lest 20%. The law also provides statutory authority for  the office of employee ownership, which previously existed only by executive order.

Massachusetts

Massachusetts created an employee ownership center through its budget process in 2019. The office had existed in the 1990s as part of the Massachusetts government, but lost its funding in the recession of 1999. In 2019, legislators were able to restore that funding. The office is staffed by two nonprofits, Working Wealth and the ICA Group.

In 2021, S. 261 was introduced to make the state center permanent and a part of the Massachusetts Office of Business Development. The office would  “provide education, conduct outreach and promote efforts to create an overall environment in the commonwealth which will expand and enhance employee ownership, increase the number of employee owned companies, publicize and promote the benefits of employee involvement and ownership to policy makers and the general public, encourage collaborative outreach efforts regarding involvement and ownership in the workplace, research and evaluate employee involvement and employee ownership in the commonwealth, showcase employee ownership initiatives in the commonwealth, facilitate and coordinate the sharing of existing information and resources, and provide grants pursuant to the provisions of this chapter.”

The Office would be able to accept outside funding as well as government support. It would be governed by a 19-person advisory committee, including representatives from employee-owned companies.

The bill was passed and signed into law in 2022.

New Jersey

In 2021, NJ Governor Phil Murphy issued Executive Order 262, which established the Wealth Disparity Task Force and tasked it with examining the causes of, and creating remedies for, the longstanding wealth disparities that affect Black and Hispanic or Latino New Jerseyans. As part of the State Fiscal Year 2024 Appropriations Act, $6 million of funding was allocated to the NJ Economic Development Authority (NJEDA) for wealth disparity initiatives based on the work of the Wealth Disparity Task Force. That same year, the NJEDA entered a memorandum of understanding with the New Jersey/New York Employee Ownership Center at Rutgers University in New Jersey to establish a program to provide outreach and technical assistance to encourage the growth of employee ownership the state.

Washington

By a unanimous vote, both chambers of the Washington State Legislature  passed S.B. 5096, “An act relating to expanding employee ownership.” The governor signed it into law, creating the most ambitious state program to date.

• Creates a state employee ownership program with a director housed in the Washington State Department of Commerce. The program would provide outreach and technical services to help promote ESOPs, worker cooperatives, and employee ownership trusts (EOTs).
• Creates an appointed commission to oversee the project. It would include four members of the legislature (one Republican and one Democrat from each house), five people from the private sector (two from employee ownership businesses, one from a business association, one private-sector economic development expert, and one from a financial institution with employee ownership transition experience), and two from the public sector (one public-sector economic development expert and one from the Department of Commerce).
• Establishes a feasibility assessment and implementation tax credit for ESOPs, worker coops, and EOTs of up to 50% of the first $100,000 for ESOPs and $25,000 for worker coops and EOTs. The total amount of credits is capped at $2 million per year.
• Creates a revolving loan fund that would directly support financing for ESOP or worker cooperative conversion transactions. This funding would be contingent on federal funds being available for this purpose. The State Small Business Credit Initiative (SSBCI) could be one such program, and the bill specifies that SSBCI funds could be used for this purpose.

Proposed General Legislation

Colorado

HB25-1021, a bipartisan bill introduced in the Colorado House of Representatives, would expand the incentives under Colorado law to encourage employee ownership. The state already provides significant tax credits for companies to adopt ESOPs, worker cooperatives, employee ownership trusts, or other structures that provide employees with at least 20% of the company's equity.

Effective 2027, the proposed legislation would provide a capital gains tax exclusion for sellers to any of the plans named above. It also would provide a deduction for federal income tax paid by a worker cooperative of up to $1 million per year. The bill would also expand the existing tax credit program for converting to an employee-owned company.

Colorado law currently provides a refundable tax credit for up to $50,000 of the costs of setting up an ESOP and 50% of the costs, up to a maximum credit of $25,000, for other plans. Effective 2026, the proposed law would increase this percentage to 75%.  Current law also provides a tax credit of 50% of the costs, up to a maximum credit of $25,000, for a qualified employee-owned business expanding its employee ownership stake by at least 20%. This proposed law would expand this to 75%. The proposed law would also allow 501(c)(3) nonprofits headquartered in Colorado to claim a refundable tax credit for up to 75% of their costs, up to a maximum of $167,000, in assisting one business per year in adopting an employee ownership plan. If the amount of the credit exceeds the income tax due on the applicable entity, the amount not used to offset income taxes is to be refunded to the entity.

Indiana

S. Bill 175, a bill that would create and fund an Indiana Employee -Owned Business Resource Center. Yoder is the minority caucus leader in the Indiana Senate.  The Center would:
•    “Provide education and awareness concerning the benefits of employee ownership and employee ownership succession.
•    Provide technical assistance to employees seeking to start an employee-owned business; or business owners exploring the possibility of transferring full or partial ownership to employees.
•    Train employees and employers with respect to methods of employee participation in open-book management, work 11 teams, committees, and other approaches for seeking greater 12 employee input.
•    Create and manage an employee ownership referral service that connects business owners and employees with local legal, financial, and technical advisers.
•    Conduct research, studies, and analyses concerning employee ownership.”
The bill would also create a low-interest revolving loan program. It does not specify a funding amount for the fund. The fund could also accept outside donations.

Indiana

A 2025 proposal, Indiana HB 1038, would create a linked deposit program for state funds to encourage ESOP lending, has been sent to committee. Sponsored by Jake Teshka (R-South Bend), the bill would revive a program that ran for several years in Indiana in the early 2000s.  The bill requires the Treasurer to establish and administer a program in which state funds are deposited in participating banks at not more than 3% below the comparable Treasury Bill rate. The bank then loans the money to a company using an ESOP to buy its own share at a reduced interest rate corresponding to CDs offered by the bank. When the program was in effect before, a few loans were made under it.  Interest rates were similar to today’s rates, but somewhat lower.

Tax Incentives

Passed Legislation

Colorado

In the comprehensive bill noted earlier, Colorado became the first state to pass a law that helps cover some of the conversion costs when becoming an employee-owned business. On June 23, 2021 Governor Jared Polis signed into law H.B. 21-1311, making sweeping changes to Colorado tax law. The bill most notably includes a provision to provide $10 million annually in tax credits until 2027 to fund professional service costs incurred when converting to employee ownership. The funding incentive awards up to 50% of conversion costs on an eligible business’ state income taxes, up to $25,000 when converting to a worker cooperative or employee ownership trust and $100,000 when converting to an ESOP (see page 21 of the bill). Qualifying expenses include accounting, business valuation, legal, succession planning, and technical assistance services. More information available in CRS 39-22-542. In 2023, the legislature upped the maximum amount for conversions to worker cooperatives to $40,000 and for ESOPs to $150,000. It also added a credit of 50% of the costs, up to a maximum credit of $25,000, for conversons to qualifying alternative employee ownership structures, such as granting equity to all employees, or expanding employee ownership in an existing firm by at least 20%. The bill is HB 23-1081.

Iowa

House File 2284, “An Act relating to employee stock ownership plans,” became law in 2012. It provides a 50% reduction in Iowa capital gains taxes for business owners selling to an ESOP as long as the ESOP owns at least 30% of the company after the sale. The provision apparently requires sellers to choose between the Iowa tax break and the Section 1042 federal tax incentive, which have significant differences. First, the Iowa legislation does not require the seller to buy qualified reinvestment property (stocks and bonds of U.S. operating companies) with the proceeds of the sale. Second, the Iowa legislation does not distinguish between C and S corporations, while Section 1042 only applies to C corporations. Because Iowa law (as almost all states) conforms business tax deductions to federal tax deductions, sellers to an ESOP in a C corporation owning 30% or more of the stock of the company already could defer capital gains taxes. So a seller in this circumstance could either use the federal deduction for state purposes and get a tax deferral by following the rules for reinvesting in qualified replacement property or take the Iowa 50% reduction in capital gains taxes and not be taxed on 50% of the gain regardless of what was done with the money. Owners of S corporations are not eligible for the federal tax deferral, so the seller would normally take the 50% Iowa exclusion.

Nebraska

In 2013, Nebraska amended a 1987 bill (LB 775) that provides Nebraska residents with a one-time capital gains tax exclusion from the sale of stock in an employee’s company. The law requires that the company have at least five employees, but in the 2013 revision (effective 2014), the law allowed a sale to an ESOP trust to qualify as well. That means that both ESOP participants and sellers to an ESOP (provided they are employees at the time) can exclude gains from the sale of employer stock from taxable income for state tax purposes. (We were unable to locate the bill providing this exclusion, but the form for claiming the exclusion can be found here.)

Missouri

In September 2016, the Missouri state legislature passed legislation (H.B. 2030) that parallels the Iowa bill in providing a 50% state tax exclusion for sales to ESPs owning 30% or more of the stock in the company. The law was originally set to sunset in 2023, but S.B. 20 contains a provision that eliminates the sunset.

Proposed Legislation

A 2025, bill, S. 1950, An Act to Promote Employee Ownership, would exempt capital gains from the sale of a Massachusetts business with 500 or fewer employees from capital gains taxation. The bill was introduced by Democrat Julian Cyr and referred to committee. The bill has been referred to committee.

Professional Corporations

Passed Legislation

New York

New York has traditionally been a state where it is difficult to operate as a majority ESOP-owned engineering, architectural, landscape architectural, or land survey firm. Existing law requires that a majority of the owners be licensed professionals. Following a 60-0 vote on May 4, 2021 the New York Senate passed S. 5261 a bill that would allow majority-owned ESOPs to qualify under New York corporate practice rules for these firms if 75% or more of the company’s voting trustees or ESOP plan committee (often the board of directors) are members of the profession. In May 2022, the Assembly passed the bill as well.

The bill was passed in 2022.

Nebraska

The Nebraska legislature passed a bill, LB 49, that would authorize the ownership of public accounting firms by ESOPs. The ESOP could own up to 49% of the firm. The bill passed in 2019 by a vote of 47-0 and was signed into law. Most states already allow minority ESOP-owned CPA firms, and Minnesota allows majority ownership.

Proposed Legislation

Texas

H.B. 2246, described in more detail above, would allow professional corporations to be owned by ESOPs, provided that the voting trustees are licensed in that profession. The bill was not acted on in the most recent legislative session (2023).

Qualification for Contracting Preferences

Passed Legislation

Maine

A new law in Maine, LD 1969 directs the Maine Public Utilities Commission to require that any renewable energy project in the state receiving $50,000 or more in state funding to meet certain labor standards, including paying prevailing wages. The law also provides that in soliciting bids for state support for renewable energy projects, the Public Utilities Commission should “consider whether a majority of the individuals working on an assisted project are members of an entity that is employee-owned, including but not limited to an entity that offers employee stock ownership plans.”

The Maine law is the first state law in the country to provide a specific employee ownership preference for using state contracting resources.

North Carolina

In 2024, North Carolina enacted S. 802, a bill on infrastructure financing that also includes an unrelated provision that allows ESOPs in which at least 51% of the participants are “minority persons or socially and economically disadvantaged individuals” to qualify for the state’s historically underutilized business set aside program. The law states that “an ESOP company applying for certification as a historically underutilized business shall provide an attestation that it meets the requirements of this subdivision together with such documentation supporting the attestation as may be required by the Secretary." The act became effective July 1, 2024.

The original version of the bill required that the ESOP company be at least 51% owned by the ESOP. That language was dropped, leaving ambiguity about whether a minority ESOP, even one with a very small percentage of ESOP ownership, would still qualify if a majority of their participants are in the covered groups.

Proposed Legislation

New York

New York Assembly Bill 5649, authored by Democratic Assembly Member Stefani Zinerman, directs the New York State advisory panel on employee-owned enterprises to evaluate barriers to certification as minority- and women-owned businesses (MWBEs) for employee-owned businesses and recommend strategies for retaining the MWBE status of existing certified business enterprises when they become employee-owned. The commission was established in 2022 to report on how the state could encourage employee ownership but has yet to issue any recommendations. The NCEO has an article on ESOPs and preferred-status certification with background information and recommendations.

Tennessee

SB 1974, "Employee Ownership, Empowerment, and Expansion Act," would extend to employee-owned companies the same contracting preferences for companies owned by disadvantaged individuals.  The state is directed to conduct an outreach program on this new rule. The bill was not acted on in the 2024 legislation.

Texas

H.B. 2246, described in more detail above, would also allow certified Historically Underutilized Businesses (HUBs) to adopt an ESOP without losing their status as an HUB. It would also create contracting preferences at the state, city, council, and special district level for ESOP owned companies. The bill was not acted on in the most recent legislative session (2023).