Employee ownership plans a hard sell in wary market. (Wall Street West).

WHO would want to be in an employee-stock ownership program, post World Corn, post Global Crossing, post whatever-is-going-to-melt-down this week?

Proponents contend that ESOPs -- vehicles for employee ownership of a public or privately held company's stock -- still offer a lot to both employees and business owners. The seller, under federal laws in existence since 1974, can keep capital gains tax-free if sales to an ESOP are reinvested in U.S. securities, while employees can consider payments made to acquire the company to be tax deductible.

"Congress wanted to promote employee stock ownership back in 1974, and so the tax code reflects that," says George Ray, chairman and chief executive of LeFiell Manufacturing Inc., in Santa Fe Springs, an aerospace and aircraft sector subcontractor. Ray also is vice chairman of the National ESOP Association.

There is no arguing the tax picture for ESOPs is pretty sweet. But in these cautious times, some are counseling business owners and employees not to leap into ESOPs.

"I generally like ESOPs, but you have to consider the timing," said Bob Rosowski, partner with Ernst & Young in downtown Los Angeles. "The valuations are going to be low now, and the Department of Labor is going to be scrutinizing ESOPs very closely."

Generally speaking, ESOPs buy companies at a value determined by independent evaluations known as fairness opinions. Fairness opinions are paid for by the owner (seller), and their objectivity can be the subject of litigation if a company later fails, Rosowski said. If the litigation succeeds, owners may find themselves hiring expensive lawyers and owing fees to the Internal Revenue Service.

In the past, some fast-footed owners have used ESOPs as an exit strategy, selling their company to an ESOP that leveraged up to make the acquisition. In some examples, the departing owner took along prime prospects, or after a few turns of bad luck, the ESOP-owned business collapsed under the new debt load.

Still, only a tiny fraction of the nation's 3,000 active ESOPs are ill-conceived, contends Ray, who says industry studies strongly suggest that motivated employees work harder, and that ESOP-companies perform better than like non-ESOP companies.

LeFiell Manufacturing is majority-owned by the ESOP, and most LeFiell employees participate. "Our absenteeism rate is 0.8 percent," Ray said.

Whatever their virtues, ESOPs may be a tough sell for a while. The big bogeymen are concentrated investment portfolios, which did in many Enron employees. Ideally, investors should not keep most of their nest eggs in one basket. Yet with an ESOP, that often happens.

"Well, that is one of the risks of business ownership," Ray explained. "Most business owners are over-concentrated. Many homeowners are over-concentrated. You get benefits, but you also get risks."

Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. He can be reached at [e-mail].