Employee ownership benefits businesses by increasing staff loyalty, retention, and profitability. Certain methods offer tax advantages, as well. Several options exist for giving workers part ownership in your company, and your decision depends on multiple factors, including your business’s size.
Once you understand how broad-based worker ownership and stock options models differ, use the free resources below to assess your choices. Look for a solution that provides benefits throughout your company’s lifespan. Don’t forget to consult with your financial and tax advisors to explore lesser-known factors affecting your decision.
Employee stock ownership plans (ESOPs)
An ESOP is a federally regulated retirement plan (similar to a 401k) that puts stocks into a trust on behalf of employees without requiring them to buy it. You can transfer all or some of your company’s shares and finance the stock purchase using a federal tax incentive credit. Project Equity recommends ESOPs for companies with at least 40 to 50 employees and $2 million in annual revenue.
Typically, ESOPs are “created through conversions of existing ownership structures,” according to Rutgers School of Management and Labor Relations. Without additional configuration, ESOPs don’t provide substantial voting rights to workers. But democratic governance is possible by allowing employee participation on the board of directors or trustee committees or by electing plan trustees.
Employee stock ownership plans improve organizational performance because workers have skin in the game. When your company does well, employees benefit financially. Business owners also use ESOPs as part of their exit (succession) planning or to diversify their stock investment portfolio. Learn more by taking Rutgers’ free ESOP course.
[Read more: 4 Smart Enhanced Employee Benefits To Kickstart Recruiting]
Worker cooperatives
A worker co-op is 100% employee-owned and -governed. The business owner sets minimum eligibility requirements, and when workers meet them, they can buy their membership share. This gives each employee one vote when electing the board of directors or voting on shareholder matters. Co-op members can serve on the board of directors and receive annual dividends, with profit-sharing based on the hours worked.
Unlike ESOPs, the cooperative model is less expensive to set up and maintain. Rutgers said small startup companies with 10 or fewer workers generally take this approach, but there aren’t any federal guidelines, and regulations vary by state. The U.S. Federation of Worker Cooperatives breaks down different entity types, including cooperative corporations available in 23 states. Plus, check out Northwest Cooperative Development Centers’ interactive worker co-op course.
Employee stock ownership plans improve organizational performance because workers have skin in the game.
Employee ownership trust (EOT)
A business owner can create an employee-owned trust, also called a perpetual employee trust, and fund it as a company expense. The trust then purchases some or all shares from the owner; membership is free for workers. According to attorney Deborah Groban Olson, “the trust is the direct owner” of the company, and “trustees operate it for the benefit of the employees, who are trust beneficiaries.”
EOTs are flexible, allowing the initiator (or the trust members after formation) to allocate profits based on a formula that looks at seniority, base compensation, or other factors. There are also many ways to structure employee control and input on company direction by amending the bylaws or operating agreements.
The National Center for Employee Ownership (NCEO) said this arrangement is fairly new in the United States and works for companies of all sizes. Worker well-being is the primary purpose of an EOT. The NCEO noted that businesses also use trusts to preserve the legacy, meet social or environmental goals, or benefit the community.
[Read more: Employee Benefits 101: What to Offer and How to Decide]
Stock plans
Many equity compensation and profit-sharing stock plans are available for worker-centered business models. Most promote broad-based ownership without the costs associated with ESOPs. However, benefits to employees and business owners vary, as does governance. Partial ownership through stock plans can boost your small business benefits package.
Stock-based options include:
- Employee stock purchase plans (ESPPs): Includes tax-qualified and nonqualified programs.
- Direct stock purchase plan (DSPP): Employees buy shares with their personal after-tax funds.
- Restricted stock: Requires workers to meet specific conditions to purchase shares or receive them as a gift.
- Stock appreciation rights (SAR): Compensates employees based on company performance.
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