About C3SOPs

The C3SOP® is an adaptation of the employee stock ownership plan (“ESOP”) to nonprofit corporations.  ESOPs are a type of qualified retirement plan sponsored by 7,000 U.S. businesses.  Adaptation of the ESOP concept to nonprofit organizations is somewhat counter-intuitive, since ESOPs are designed to invest primarily in employer securities (which nonprofits do not issue) and are encouraged by a series of incentives related to federal income and capital gains taxes (which nonprofits do not pay).

While ESOPs have been associated exclusively with for-profit enterprises, it is increasingly common for large and growing nonprofit organizations to control both nonprofit affiliates and for-profit subsidiaries.  In a C3SOP, a nonprofit PARENT company (“PARENT”) establishes a for-profit holding company (“HOLDINGS”) that owns the equity of one or more for-profit subsidiaries.  Through the new C3SOP technique, employees of  the PARENT and its controlled group of corporations, including PARENT’s for-profit subsidiaries and nonprofit affiliates, will participate in an ESOP sponsored by PARENT, and the ESOP (using employer contributions to the ESOP Trust) will purchase a minority interest of up to 49% in HOLDINGS.   In this way, the C3SOP permits PARENT to access a new, substantial, and perpetual source of investment capital, thereby enabling PARENT and HOLDINGS to grow more rapidly than would otherwise be possible.

 

 

 

 

The organizational chart above illustrates the structure of an enterprise that includes a C3SOP.  The value adding attributes of this model include the following:

  • C3SOPs enable nonprofit enterprises to expand their access to capital because employer contributions to the ESOP Trust MUST be invested in qualifying employer securities (essentially common stock issued by the plan sponsor or members of its controlled group of companies); indeed, the larger the employer’s salary expense for ESOP participants, the greater the potential ESOP plan contributions and the more capital generated;
  • HOLDINGS may be incorporated as either a C corporation or S corporation, each providing the plan sponsor and plan participants with attractive tax benefits;
  • The nonprofit holding company structure facilitates the conversion of nonprofit assets or affiliates to for-profit ownership, since upon conversion, 100% of the newly created equity continues to be owned by PARENT;
  • ESOP Trust assets may be diversified because the ESOP Trust owns shares in HOLDINGS, and HOLDINGS may invest in a diversified portfolio;
  • ESOPs can provide PARENT with a competitive advantage stemming from the enhanced alignment of corporate and employee interests – and its impact on employee turnover and service quality.

In the short term, many economists are forecasting continuing low U.S. interest rates, increases in both capital gains and income tax rates, and growing pressure on governments to curtail budget deficits.  In the intermediate term, there is a significant probability that the U.S. will face an interval of high inflation.  In these circumstances, the timing is ideal for consolidation of the various fragmented industries and industry segments dominated by nonprofit organizations.  The C3SOP can play an important role in this process.