Employee Ownership

Employee ownership is a business model in which a company is owned and controlled by the people who work for the company. Employees are able to become stakeholders for the business through ownership of stock or shares. The Main Street Employee Ownership Act of 2018 created an opportunity for businesses to adopt a business structure that puts decision-making in the hands of employees as they have stake in the success in the company. The following are the most common types of employee ownership:

Employee Stock Ownership Plans (ESOP) are the most common choice for employee ownership. ESOPs are available to S Corporations and C Corporations which sell all or part of company shares to a trust. The trust is administered on behalf of employees who earn their shares as a retirement benefit.
Employee Ownership Trust (EOT), also called Perpetual Employee Trusts, is an indirect form of employee ownership when a company sells its shares to a trust. Employees benefit from profit-sharing, in which a portion of company profits are allocated to employees.
Worker Cooperatives are 100% employee-owned and managed as employees purchase shares representing their voting power in the company. This business structure promotes democratic decision making as employees elect a Board of Directors, which are typically employee-owners.

Advantages & Disadvantages of an Employee Owned Business

Advantages

Owner Benefits

Succession Planning – Employee ownership presents an opportunity for business owners to adopt a hands-off management style as employees are more invested in day-to-day business activities. When the company’s most prominent leaders decide to leave, employees are equipped to continue business operations.
Tax Benefits – Depending on the model formed, business owners of employee-owned firms may be eligible for tax deductions, such as contributions to stocks and cash contributions. Additionally, S Corporations are often not required to pay federal and state income tax depending on the percentage of shares owned by employees. Always consult a tax professional.
Employee Recruitment and Retention – Employees are more likely to stay at the company to continue receiving financial benefits in addition to other aforementioned positive attributes of working for an employee-owned business. Moreover, employee ownership is an attractive quality to job seekers.

Employee Benefits

Build Wealth – Similar to investing in a 401(k), employee ownership may act as a retirement plan and generate wealth for the duration of their employment at the company.
Ownership Culture – Employees may feel a greater sense of pride and responsibility toward the success of the business as they have a personal stake in its performance.
Increased Motivation – Employees are more motivated to perform well at work when they align with the company’s values. People may be more likely to choose to work for a company they believe provides important products and services, and they may feel passionate about their work.

Disadvantages

Mission Drift – As decision-making is a cooperative effort among business owner and employees, there is a risk of disagreement among the mission or direction of the business. This could result in tension among the organization or leadership derailment.
Upfront Costs – When selling company shares to an ESOP or private equity firm, the business must be able to make an immediate cash payment to the buyer. The cash flow dedicated to an ESOP may greatly limit the cash available for short-term business operations. Small startup firms may experience delayed profits or growth because of the initial investment.
Recordkeeping and Regulatory Restrictions – Though there are numerous tax advantages for employee-owned firms, documentation requirements may be arduous as the IRS guidelines regulate compliance in order to receive maximum benefits. Data collection, allocating shares, tracking accounts, producing statements for shareholders, and preparing tax forms are some of the administrative functions required to effectively operate an employee ownership plan. Additionally, other government agencies may have further rules and standards, e.g. ESOPs are regulated by the Employee Benefits Security Administration (EBSA). Always consult tax and legal professionals.