The Changing Landscape of Business Succession: How and Why Purpose Trusts Matter

Abstract

When Yvon Chouinard tried to find a way to protect the values of the company he had built, his lawyers and advisors created a purpose trust to hold the voting shares of Patagonia. This structure, ownership of a business in a purpose trust, represents an evolution of business ownership that can help address inequities in wealth and income, while preserving businesses for the benefit of employees and communities. Chouinard and his family donated their business interests to the purpose trust and a related social welfare organization, but most purpose trust restructuring is accomplished with a sale of the ownership interests to the trust. The trust owns the business, which continues to operate for its business purposes. Profits are used for the ongoing development of the business and to benefit employees and other stakeholders.

A purpose trust focused on employees allows employees to share collectively in decision-making and economic benefits from the business. This article explains the purpose trust structure and how it can benefit employees and protect a company’s purposes over the long-term. The article compares this structure with ESOPs and worker cooperatives, two forms of employee ownership, and explains the benefits of using an employee-centered purpose trust. Given the advantages for society and government if more businesses transition to this form of employee ownership, the article concludes with recommendations for ways to incentivize and encourage transition of business ownership to employee-centered purpose trusts.