Business Succession Planning Using a Purpose Trust

By | December 13, 2023

With nearly 2.7 million U.S. businesses owned by baby boomers,1 succession planning for these businesses has become critically important. For some owners, the next generation of the family has both the interest and the ability to continue to manage the business. For other owners, the sale of the business to a third party will be the right solution, providing money for retirement, family members, or charitable causes. But some owners may worry that a buyer, even if one can be found,2 will not operate the business with the same attention to sustainability and employee welfare that the owners have had. These owners want to protect the purpose of the business, beyond just the generation of income for shareholders. For these owners, a purpose trust may be the right succession plan. 

A purpose trust is a trust created without beneficiaries for the purpose of owning and operating a business.3 This type of trust may also be called a perpetual purpose trust, a stewardship trust, or an employee ownership trust. All these names refer to the type of trust described in this post. In a purpose trust, the trust itself owns the business (the trustee has legal title to the shares of stock). The trust operates as a directed trust, with a management committee directing the trustee in making major decisions for the company, including election of the company’s board of directors. The trust instrument also names a trust protector, who keeps an eye on the trustee and the management committee to make sure that the intended purpose is followed. The management committee can include representatives elected or appointed by various stakeholder groups: family members of the original owners, employees of the company, nonvoting preferred shareholders, or other stakeholders, depending on the type of business. 

The reason a business owner might consider transferring control of the business to a purpose trust is that the purpose trust structure can protect a company’s mission over the long term. A business operated sustainably, with concern for its environmental impact, can continue to operate in a way that minimizes environmental harm, even if doing so reduces financial profit. The business can be operated for the benefit of its employees, with attention to safe working conditions, fair wages, and good benefits, and with distributions of profits to employees through profit-sharing or contributions to retirement accounts. The business might also set aside profits for research and development, protecting the long-term viability of the company. Further, locally-owned businesses improve local economic performance, including per capita income growth, employment growth, and change in poverty,4 so avoiding a sale to a non-local owner can benefit the community. 

Although purpose trusts have many benefits, there are no tax benefits for transferring a company to a purpose trust and a purpose trust is taxed as a trust. Any profits distributed to the trust will be taxed at trust income tax rates, and a trust reaches the highest bracket quickly. For this reason, a purpose trust should be structured so that dividend distributions from the company to the trust should only be the amount necessary to cover administration costs. The company should use most of the profits at the company level: making loan payments if loans funded the transition, paying dividends to preferred nonvoting shareholders, retaining profits for research and development, making profit sharing distributions to employees, and making charitable contributions in the community. 

Comparison with an ESOP 

A purpose trust provides benefits that are different from the benefits provided by an Employee Stock Ownership Plan (ESOP). The goal of an ESOP is the retirement security of current employees, but not employee control of the business and not the long-term continuation of the business. An employee holding shares in an ESOP must be allowed to vote those shares in connection with major company decisions such as selling all the assets of the company, but typically the ESOP trustee votes the shares on most issues.5 The trustee may be aligned with management and may put the interests of management over the interests of employees.6 The employee “cashes out” when the employee retires or leaves the company, and the need for liquidity may create problems for the company. Further, if the trustee receives an offer to purchase the business, the trustee may have a fiduciary duty to accept the offer, if doing so will maximize the financial benefits to the ESOP participants.7 If the business is sold, the buyer may move or close the business or may choose to operate the business in a fundamentally different way. The interests of the employees (and the community) in the continuation of the business are not protected. An ESOP comes with various tax benefits, but the costs to establish and administer an ESOP are greater than costs associated with a purpose trust.8  

Employees who participate in an ESOP benefit from the increased saving for retirement. In contrast, employees in a company held in a purpose trust benefit through control over decisions that affect working conditions and may benefit annually through profit sharing. These employees have an incentive to help the business succeed, because their benefits increase when the business is profitable. 

The Patagonia Purpose Trust 

When Yvon Chouinard used a purpose trust to restructure the ownership of Patagonia, he gave the voting shares of the company to a purpose trust and gave the rights to the distribution of profits to the Holdfast Collective, a social welfare organization exempt from federal income tax as a § 501(c)(4) organization.9 The gift to the purpose trust generated a gift tax, while the gift to the social welfare organization was exempt from gift tax. Patagonia will continue to operate sustainably, with attention to environmental concerns, and will operate with the welfare of its employees as an important part of the way it does business. These core values will continue, protected by the trust structure. The profits will be used by the Holdfast Collective to address climate change, a key concern for Chouinard. Chouinard could have sold Patagonia and put the proceeds in the Holdfast Collective, but he wanted to ensure that the business continued to operate with the values that were important to him. Chounard explained, “we couldn’t be sure a new owner would maintain our values or keep our team of people around the world employed. Another path was to take the company public. What a disaster that would have been. Even public companies with good intentions are under too much pressure to create short-term gain at the expense of long-term vitality and responsibility.”10 

The John Lewis Partnership and Bosch 

Two examples, one of a purpose trust and one of a structure that operates with a similar effect, show that a structure without individual ownership can be successful. The John Lewis Partnership is a trust established in England in the first half of the twentieth century. John Spedan Lewis created the first Constitution of the John Lewis Partnership in 1928 and began transferring his shares to the trust, completing the transfer in 1950.11 The business is managed through democratic elections (each employee has one vote) and a set of checks and balances. The employees elect a Partnership Council, the Council elects a five-person Partnership Board, and the Board manages the business, together with a Double Chair who is chair of the business and of the trust.12 The trust operates John Lewis & Partners (an omni-channel retailer), John Lewis Finance (which offers financial products), and Waitrose & Partners (an upscale grocery chain), with over 80,000 employee/partners who share in profits each year. The Partnership continues to follow John Spedan Lewis’s goal of operating a business with happy employees, stating that its purpose is “Working in Partnership for a Happier World.”13 

Robert Bosch founded his company, Bosch, in Stuttgart, Germany, in 1886, with a commitment to providing good conditions for employees.14 He left instructions for managing the company in accordance with his principles, and the current structure, developed after his death, has been in place since 1964.15 Bosch’s descendants retain a small interest in the company (7% of the voting shares and 8% of the nonvoting shares with dividend rights). The remaining voting shares are held by the Robert Bosch Industrietreuhand KG and the remaining nonvoting shares are held in the Robert Bosch Stiftung, a charitable foundation. Dividends received by the foundation are used for charitable causes important to Robert Bosch. The Robert Bosch Industrietreuhand KG is managed by a group of ten steward-owners, four of whom are current executives of the Bosch company and six of whom are external business professionals. The steward-owners select new members for five-year terms.16 Without the pressure of individual shareholders, the Bosch company has been able to invest heavily in research and development and obtain a competitive advantage by doing so.17 The company has over 420,000 employees and had sales revenue of 88.4 billion euros in 2022.18 

These two examples, the John Lewis Partnership and Bosch, show that a structure without individual shareholders can succeed in large companies as well as small ones. They also demonstrate that a company that emphasizes good working conditions for its employees and in which employees play a decision-making role, can be financially successful. In recent years, some companies in the United States have made the transition to ownership by a purpose trust. Examples include Organically Grown Company (a produce distribution company based in Oregon and operating in five states);19 ZingIP, LLC (an intellectual property holding company owned by Zingerman’s Community of Businesses, in Ann Arbor, Michigan);20 Local Ocean (restaurant and fish market in Newport, Oregon);21 Optimax Systems, Inc. (largest manufacturer of prototype optics in the U.S., based in upstate New York).22 

Sale to a Purpose Trust 

Most business owners may want to receive all or part of the value of their company when they transfer shares to a purpose trust. The transfer can be structured as a sale or as a part-gift, part-sale. The sale may be funded through existing reserves, by the sale of nonvoting preferred stock, or through loans that will be repaid from the profits of the business. A sale will have income tax consequences for the founders, while a gift of shares to the purpose trust will be subject to gift tax if the founder is alive or estate tax if the transfer happens at the founder’s death. Careful tax planning for transfer of stock to a purpose trust, whether through a sale or by gift, is critical. An important point, though, is that if the business has been operating successfully, the owner can fund retirement or provide money to family members without selling the business to a third-party.  

A New Tool for Business Succession 

For some business owners the non-financial benefits a business provides – safe working conditions for employees, valued goods or services for customers, commitment to the local community, and a sustainable way of doing business – may be just as important as personal financial rewards. By transferring control of the company to a purpose trust, the business owner can protect the mission of the business and make it more likely that the business will continue to operate with the values important to the owner. 


Susan N. Gary is a Professor of Law Emerita at the University of Oregon.  

This post was adapted from her paper, “The Changing Landscape of Business Succession: How and Why Purpose Trusts Matter,” available on SSRN 

One thought on “Business Succession Planning Using a Purpose Trust

  1. Samuel Brown

    I strongly agree that the reason a business owner might consider transferring control of the business to a purpose trust is because the purpose trust structure can protect the mission of the company in the long term.


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