.png)
For many business owners, succession appears to offer a familiar set of choices:
Pass the business to the next generation.
Sell it to management or employees.
Sell it to an outside buyer.
Those remain important options. But they are not the only ones.
Some founders want the company to remain independent even if their children do not want to own it. Others want employees to participate in the value they helped create. Some want to preserve a company’s mission, culture, community role, or long-term purpose beyond the founder’s lifetime.
For those owners, the succession question may be broader than:
Who should own the business next?
It may be:
What ownership structure gives the enterprise the best chance of continuing in the way we actually want?
That question has led to growing interest in alternative and perpetual ownership structures, including perpetual purpose trusts, employee ownership trusts, ESOPs, management ownership, charitable ownership, and hybrid models.
The right structure depends on what the owners are actually trying to preserve.
Traditional family ownership is one succession path
For many family businesses, continued family ownership remains the right answer.
Ownership may pass from a founder to children, from siblings to cousins, or through trusts established for future generations.
But family succession depends on more than having descendants.
The next generation must want—or at least be prepared—to assume the responsibilities of ownership. The family needs a workable governance system. The economics must support both the enterprise and its owners. And the ownership structure has to continue making sense as the number and roles of family members change.
That is why the first question should not automatically be:
How do we transfer the shares to the children?
It should be:
What do we want the ownership of this enterprise to accomplish after the founder?
For more on traditional family ownership succession, see Family Business Succession: How Ownership Changes Across Generations.
And for the distinction among ownership, control, economics, and management, see Ownership and Control in a Family Business: A Legal Guide to Separating the Two.
Start with the outcome, not the structure
Owners often encounter a structure before they have defined the problem.
A purpose trust.
An ESOP.
An employee ownership trust.
A foundation.
A management buyout.
But these structures solve different problems.
One founder may care most about keeping the company independent.
Another may want to provide liquidity to the family while preserving jobs and company culture.
Another may want employees to share economically in the enterprise.
Another may want the business to continue serving a particular mission.
Another may want family members to remain connected to the enterprise without requiring them to become its permanent owners.
Those are different objectives.
They may require very different ownership structures.
So before choosing a vehicle, the owners should identify what is actually supposed to survive the transition:
- family ownership;
- family control;
- company independence;
- employment;
- mission or purpose;
- community impact;
- employee participation;
- long-term reinvestment;
- a particular culture;
- economic value for the family; or
- some combination of these.
Only then should the structure be selected.
What is perpetual ownership?
“Perpetual ownership” is not one particular legal form.
It generally describes ownership structures designed so that a business does not have to be transferred or resold to a new group of individual owners every generation.
In a conventional ownership model, an individual or family owns shares. Eventually those shares are sold, gifted, inherited, or otherwise transferred. The next owner ultimately faces the same transition question.
A perpetual ownership structure may instead place ownership in a trust or other vehicle designed to continue for the long term under a defined purpose and governance system.
One increasingly discussed U.S. model is the perpetual purpose trust.
What is a perpetual purpose trust?
A purpose trust is a trust established to advance a specified purpose rather than primarily for identified individual beneficiaries.
A perpetual purpose trust, or PPT, is a purpose trust established under the law of a jurisdiction that permits the trust to continue indefinitely.
In a business succession, the trust can own shares of the operating company and exercise its ownership according to the purposes and governance rules established for the trust.
The American Bar Association has described PPTs as an alternative business-succession model that can be used to preserve a company’s mission, independence, and long-term stewardship.
That changes the succession question.
Instead of asking only:
Which person should receive the stock?
the owners may ask:
What purpose should ownership serve, and what governance system will protect that purpose after we are gone?
A PPT may therefore be worth considering when a founder wants a business to continue independently but does not want its future to depend on each succeeding generation of family members continuing to own it.
State law matters. Noncharitable purpose trusts are creatures of state trust law, and the permissible duration, governance structure, enforcement mechanisms, fiduciary roles, and tax treatment require careful analysis in the jurisdiction selected. Delaware, for example, expressly recognizes noncharitable purpose trusts and provides for an enforcer when appropriate.
Purpose trust ownership does not eliminate governance
Moving company shares into a trust makes governance more important.
A purpose-trust structure may need to address:
- who exercises shareholder rights;
- who appoints or removes directors;
- who interprets the trust’s stated purpose;
- who monitors the trustee;
- how leadership is held accountable;
- what financial objectives the company must continue to meet;
- how conflicts among purpose, profitability, employees, family interests, and other stakeholders are resolved; and
- what happens when circumstances change decades later.
Depending on the structure, the governance architecture may involve trustees, trust protectors or enforcers, stewardship committees, company directors, and other decision-making bodies.
The trust is therefore only part of the design.
The ownership and governance systems have to work together.
What is an Employee Ownership Trust?
An Employee Ownership Trust, or EOT, is a trust-based ownership structure designed to hold company shares for the long-term benefit of employees.
Instead of employees individually purchasing and holding the company's shares, the trust owns the shares collectively. Employees may benefit through profit sharing or other economic arrangements established under the structure.
In the United States, EOTs are still an emerging ownership model. Unlike ESOPs, there is no single federal EOT regime with a specialized set of tax and employee-benefit rules. U.S. EOTs generally depend on state trust law and the particular tax, corporate, financing, and governance structure selected. The National Center for Employee Ownership describes U.S. EOTs as purpose trusts that hold shares for employees and notes that they do not carry the special federal tax benefits applicable to ESOPs.
For a U.S. founder, an EOT may be worth exploring when the objective is long-term employee stewardship rather than individual employee share ownership.
EOTs and ESOPs are not the same thing
The names sound similar.
The legal structures are very different.
An Employee Stock Ownership Plan, or ESOP, is a federally regulated qualified defined-contribution retirement plan designed to invest primarily in qualifying employer securities. The IRS and Department of Labor share regulatory jurisdiction over aspects of ESOPs.
An EOT is generally a trust-based ownership arrangement outside that qualified retirement-plan framework.
Both can facilitate employee ownership, but they operate through different bodies of law and have different tax, fiduciary, valuation, governance, financing, and administrative consequences.
ESOPs are a well-established succession option and may be appropriate for some companies. They also require specialized ERISA, tax, valuation, trustee, and financing expertise.
For that reason, an owner should not begin with:
Should we do an ESOP or an EOT?
The better starting point is:
What are we trying to accomplish for the owners, the company, and the employees?
The appropriate specialists can then evaluate which structure is capable of delivering that outcome.
Management ownership
Alternative succession does not necessarily require a perpetual trust.
A management buyout, or MBO, can transfer ownership to the people already operating the company.
That can be particularly attractive when the founder has developed a capable leadership team but the next generation does not want to become the company's owners or operators.
Management ownership may preserve leadership continuity, institutional knowledge, customer relationships, and culture while giving the founder or family a path to liquidity.
But an MBO raises its own ownership-design questions:
How much ownership transfers initially?
How will management finance the acquisition?
Will the seller retain equity?
Will the seller finance part of the purchase price?
When should voting control transfer?
How much leverage can the business safely support?
What governance protections are appropriate during the transition?
How will the company's need for growth capital compete with acquisition debt?
A management buyout is therefore more than a sale transaction.
It is an ownership succession structure.
What about charitable ownership?
Charitable ownership can also play a role in business succession, but it requires particularly careful legal and tax design.
A founder may want some or all of the economic value of a business to support charitable purposes while allowing the operating company to continue.
But transferring an operating business to a private foundation is not as simple as donating ordinary investment assets.
Charitable ownership can work, but the rules are restrictive. A private foundation generally cannot simply own and operate a business indefinitely without meeting a specific federal exception. That exception requires the foundation to own the business outright, receive the ownership by gift or bequest rather than purchase, and maintain meaningful separation between the business and the founder’s family.
Other charitable structures may involve different rules.
So while charitable ownership can be powerful for the right family enterprise, it requires integrated analysis of corporate law, tax-exempt organization rules, business-holdings restrictions, governance, valuation, fiduciary obligations, estate and gift tax, and the family's continuing role.
This is precisely why the ownership objective should be clear before selecting the vehicle.
Hybrid ownership may be more realistic than choosing one box
Business succession does not always require choosing between family-owned and not family-owned.
An enterprise can have more than one category of owner, and ownership, control, economics, and management do not always have to sit in the same place. Patagonia is a well-known example: the Patagonia Purpose Trust holds the company’s voting stock, while the Holdfast Collective holds the nonvoting stock, separating control from most of the economic ownership. Bosch uses a different model, with the Robert Bosch Stiftung holding most of the share capital while voting control is held largely through Robert Bosch Industrietreuhand KG. Carlsberg provides another example of foundation ownership alongside outside shareholders, with the Carlsberg Foundation maintaining control of the voting rights in Carlsberg A/S.
A family enterprise can use the same principle more modestly. The family might retain real estate after the operating company changes hands. Management might acquire part of the business while the family retains another interest. Employees may participate economically without controlling the company. A charitable or trust-based vehicle may hold one class of ownership while governance rights are structured elsewhere.
The objective does not have to be preserving every asset in identical ownership.
Instead, the family can ask:
What should remain family-owned?
What should remain under family influence?
What should continue even if the family no longer owns it?
Those are different questions.
How does alternative ownership relate to a family enterprise?
A family enterprise is broader than any one operating company.
It includes the family, businesses, real estate, investments, capital, ownership structures, governance, and people responsible for stewarding what has been built.
That means a family enterprise does not necessarily cease to exist merely because the original operating company moves outside traditional direct family ownership.
Suppose a family eventually transfers an operating business to a perpetual purpose trust.
The family may still own significant real estate.
It may have investment assets.
It may continue its philanthropy.
Future family members may still serve in carefully designed stewardship or governance roles.
The family may use its capital to acquire or build other businesses.
And the rising generation may still need to become capable owners and stewards of everything that remains.
Changing the ownership of one business can therefore be part of the evolution of the family enterprise rather than the end of it.
For more on that broader concept, see What Is a Family Enterprise?
When should a family consider alternative ownership?
Alternative ownership deserves consideration when the owners want continuity, but conventional generational transfer does not fully solve the problem.
For example:
- no family successor wants to own or operate the business;
- the family wants the business to remain independent;
- descendants want a connection to the enterprise without becoming permanent controlling shareholders;
- employees or management are central to the future of the company;
- the founder wants to preserve a particular mission or long-term purpose;
- repeated fragmentation of family ownership would eventually become unworkable;
- the family wants liquidity but does not necessarily want a conventional third-party sale; or
- the owners simply want to understand the full range of succession options before choosing one.
Those facts do not mean a PPT, EOT, ESOP, management buyout, charitable structure, or hybrid model is necessarily appropriate.
They mean the family should design the desired outcome before choosing the ownership vehicle.
Alternative ownership is legal architecture
Whatever structure is chosen, the legal design eventually has to answer concrete questions.
Who owns the equity?
Who exercises voting rights?
Who appoints the board?
Who benefits economically?
Who can transfer or sell an interest?
Who has the power to change the structure?
How is management held accountable?
How does the founder receive liquidity?
How will the transition be financed?
What happens to family-owned real estate?
What role, if any, does the family retain?
How are tax, trust, corporate, charitable, employee-benefit, estate-planning, financing, and governance rules coordinated?
And what happens when circumstances change twenty or fifty years later?
That is why alternative ownership is not merely a conversation about legacy.
It is legal architecture.
Do not choose the vehicle before defining the destination
An ownership structure can be technically sophisticated and still solve the wrong problem.
Before selecting one, the owners should be able to answer:
What are we trying to preserve?
What can change?
How much liquidity does the family need?
Should the family continue to own?
Should the family continue to control?
Should employees or management participate economically?
Does the company need to remain independent?
Is perpetual ownership actually desirable?
What happens to related real estate and other enterprise assets?
What role should future generations have?
What level of complexity can the company realistically support?
The answers may lead to continued family ownership.
They may lead to a management buyout, ESOP, EOT, purpose trust, charitable structure, third-party sale, or a hybrid.
The structure comes second.
The ownership objective comes first.
And that is particularly important for business-owning families. As discussed in Your Estate Plan Is Not Your Business Succession Plan, transferring wealth and designing the future ownership of an operating enterprise are related—but different—problems.
Exploring an ownership transition?
If you know the current ownership structure cannot simply continue indefinitely, but you are not yet sure whether the right path is family succession, management ownership, employee ownership, perpetual ownership, charitable ownership, a sale, or some combination, the first step is not choosing a structure.
It is defining what you want the transition to accomplish.
Roots & Wings Legal helps business-owning families define ownership and succession objectives, evaluate structural alternatives, design the legal architecture, and coordinate specialist implementation once the direction is clear.