Small Business Status Saved: New Bill Protects ESOPs, Expands Tax Breaks for Employee-Owned Companies

This legislation, the Promotion and Expansion of Private Employee Ownership Act of 2025, is a major push to make employee ownership the go-to succession plan for small businesses. Essentially, it uses tax breaks and administrative support to encourage owners of S corporations—think smaller, often family-run businesses—to sell their company stock to their employees through an Employee Stock Ownership Plan (ESOP).

The Permanent Tax Break for Selling Owners

If you own an S corporation and are looking to retire, this bill makes selling to your employees financially much sweeter. Current law allows owners who sell their stock to an ESOP to defer paying capital gains taxes on that sale, but this benefit was set to expire in 2027. This bill (Sec. 3) effectively removes that expiration date, making the full tax deferral permanent. Think of it as a massive, long-term incentive for business owners to choose their employees over a private equity firm when selling the company. The bill also removes a specific restriction (subsection (h) of Section 1042) that previously limited when S corporation ESOPs could qualify for this tax deferral, opening the door for more transactions to qualify.

Saving Small Business Status

One of the biggest headaches for small businesses that transition to employee ownership is the risk of losing their “small business concern” status under the Small Business Act. This status is crucial for accessing federal loans, contracts, and other programs. Right now, if an ESOP buys more than 49% of a company, the business risks losing that status. The bill fixes this (Sec. 5) by changing how the ownership is calculated. Instead of treating the ESOP as one giant owner, the Small Business Administration must now calculate eligibility by treating each employee participating in the ESOP as an individual owner. For a business owner, this means you can sell a majority stake to your employees without jeopardizing your company’s access to vital small business resources, like favorable SBA loan terms. This change takes effect on January 1st of the first full year after the law is enacted.

Government Support and Education

To make sure this transition is smooth, the bill sets up two new government functions dedicated to employee ownership. First, the Department of the Treasury is instructed to create the S Corporation Employee Ownership Assistance Office (Sec. 4). This office will handle outreach, education, and technical assistance for companies interested in starting an ESOP. Second, the Department of Labor must establish an Advocate for Employee Ownership (Sec. 6). This advocate acts as a liaison, helping resolve disputes between ESOP participants and the Department of Labor, and recommending policy changes to boost employee ownership. It’s worth noting that this Advocate can be hired without going through the usual competitive federal hiring process, which is a bit unusual for a government position but perhaps designed to bring in specialized expertise quickly. The funding for these new offices is authorized as “such sums as may be necessary,” which means Congress will need to determine the exact budgets later.

Real-World Impact: Retirement and Stability

For the average worker, this bill is about more than just tax policy; it’s about retirement security and job stability. Studies show that employees in ESOP-owned companies tend to have more stable jobs and build up significant retirement savings through their ownership stakes. If this bill succeeds, more small businesses will transition to ESOPs, meaning more Americans—from the warehouse floor to the front office—will have a valuable, funded retirement account tied directly to the success of their workplace. For example, a construction worker at a newly ESOP-owned firm could see their retirement account grow directly from the company’s profits, giving them a tangible stake in the business’s performance.