Summary
In this case study, the seven employees of Select Machine, in Brimfield, Ohio, began to purchase their company from the two retiring owners using an employee-owned cooperative. This purchase used a precedent-setting structure that (1) permits the sellers to take advantage of the ‘1042 rollover’ of their capital gains while (2) structuring the sale over a period of several years, making it easy to finance and enabling the owners to transfer their managerial expertise to the other co-op members over time.
In 1984, changes in the tax law concerning Employee Stock Ownership Plans (ESOPs) created the so-called ‘1042 rollover’ which permits owners of closely held businesses who sell 30% or more of the stock in their company to their employees through an Employee Stock Ownership Plan (ESOP) or a co-operative to shelter the capital gains from taxes by rolling the proceeds of the sale over into other qualified domestic securities within 12 months of the sale.
Today that is the number one reason for establishing ESOPs, but not one employee co-op had been established using this provision – prior to Select Machine.