My introduction to employee stock ownership plans was an accident. In the late ’90s, I was working in the consulting group of a large regional CPA firm, and Bill Blass’ namesake company was a client.

Blass had agreed to sell the company, and my firm valued the company’s intellectual property. As part of the engagement, I learned that an employee stock ownership trust was among the shareholders.

I knew nothing about ESOPs at the time, but the concept fascinated me. Most people only thought of these defined contribution plans as employee benefit tools. I realized that an ESOP could also be leveraged as a corporate finance tool to achieve shareholder liquidity. In terms of stakeholder alignment, it was a unicorn.

There were complexities, including ERISA governance and regulatory oversight, but for productive, middle-market companies, the potential upside generally outweighed the costs. Tax incentives were a major driver of these benefits. To this day, I wonder why so many closely held companies—and their outside advisers—overlook ESOP strategies for owner succession and liquidity.

To better appreciate the tax advantages, let’s look at a hypothetical transaction. Consider a California-based business structured as an LLC, where a single shareholder sells 30% equity to an employee trust for $10 million.

Capital Gains Tax Mitigation

Unlike a typical...

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