Executive Briefing discusses a recent S Corporation study that we discussed in Study: S ESOP Companies Create Jobs and Savings for Workers and Have Higher Productivity, Profitability, Job Stability, and Job Growth:

Subchapter S Has Benefits, Remains Controversial

Subchapter S corporations that are owned by employees through employee stock ownership plans (ESOPs) generate some 85,000 new jobs each year and create $14 billion in new savings for workers that otherwise would not have been earned, according to a working paper by two University of Pennsylvania professors.

The study is one of the first to closely examine ESOP arrangements at so-called S corporations—mostly small companies eligible for special tax status and exemption from corporate income tax. Congress began allowing ESOPs to own S-corporation shares a decade ago.

Study authors Michael Knoll and Steven Freeman, who received some funding from an ESOP industry group, says research suggests that S-corporation ESOP companies are more stable than other types of companies and that employee ownership is associated with increased job satisfaction and higher organizational commitment.

But ESOPs do have an Achilles' heel: a lack of funding diversity that can leave workers who rely on them for retirement in a lurch—a scenario that played out at Enron. "Any time a firm goes bankrupt, nearly all equity is lost, so when firms with substantial employee ownership become insolvent, workers can lose not only their jobs and careers, but their retirement stakes as well," the authors wrote.

S-corporation ESOP companies became the subject of some scrutiny more recently when real estate magnate Sam Zell used the special tax status to finance his 2007 purchase of the Tribune Publishing Co. Some policy-makers questioned whether the special tax status afforded to S-corporation ESOP companies should be used to finance such transactions.