An Introduction to Employee Ownership Trusts
This page is a starting point for business owners and leaders who want to explore whether an employee ownership trust could be the right fit for them and their companies. The NCEO is posting this page and other resources for employee ownership trusts because of the rapid increase in interest. More companies are adopting EOTs, and both companies and professional employee ownership advisors have requested more information. EOTs also appear to be gaining momentum globally, with policy developments in Australia, Canada, and at least one U.S. state.
What is an employee ownership trust?
An employee ownership trust (EOT) is a form of employee ownership that is relatively new in the United States, but is the primary form of employee ownership in the United Kingdom. An EOT is not the same thing as an employee stock ownership plan (ESOP).
To become an EOT company, the current owner creates a trust that will own some or all of the business. There is no legal definition of what separates an EOT from similar trusts, but to be an EOT, the purpose of the trust should include the well-being of the company’s employees. The trust may include other purposes as well, such as preserving legacy, community benefit, or social and environmental goals.
The company makes a contribution of cash to the trust, which uses that cash to buy shares from the current owner. The trust can buy full or partial ownership of the business, and in some cases the owner chooses to offer seller financing.
What kinds of companies set up EOTs?
EOTs can be good fits for almost any kind of company, from four-employee startups to companies with thousands of staff and extensive fixed assets. In the US, EOT companies are in in construction, financial services, retail, book publishing, professional services, and other fields. The global flagship EOT company is the UK’s John Lewis Partnership, which employs 80,000 partners, has over 360 retail outlets, and has been owned by an EOT since 1929. (View their video introduction, A Better Way of Doing Business.)
Why do business owners choose to sell to an EOT?
The main reason is the ability to be confident about preserving the character of their business in the terms most important to them, whether that’s about management philosophy, giving back to the community, environmental values, or anything else that motivates the seller. Secondary reasons may be that EOTs are more flexible and less expensive than other forms for employee ownership, especially ESOPs.
Business owners seeking to maximize the value they receive for their stake in the company generally either sell to a third party or, sometimes, to an ESOP.
Who benefits from EOTs?
An EOT’s governing documents generally require the trust to operate in the interest of employees, although the original owner of the shares may specify other purposes for the trust as well. The trust is governed by trustees and trust protectors, both of whom have a legal obligation to serve the stated purposes of the trust. Some EOTs are set up so that employees either serve in a governance role on the trust or have a role in selecting the trustees or trust protectors.
In financial terms, employees do not pay to be beneficiaries of the trust. Most trusts specify a process by which the company dedicates a portion of its annual profits to a profit-sharing pool for employees.
How is an EOT different from other forms of employee ownership?
Both EOTs and ESOPs involve trusts that operate in the interests of employees, but the differences between them are large. Some of the crucial differences are that ESOPs are created by Congress, which results both in significant tax incentives and in substantial regulatory requirements and a high degree of fiduciary responsibility for the proper operation of the ESOP. ESOPs must follow rules about which employees participate in the plan and on what terms, while EOTs offer great flexibility.
Our article Employee Ownership for Closely Held Companies: ESOPs, Equity Grants, Trusts, and Worker Cooperatives compares these four forms of employee ownership side by side in table format.
How to learn more
- A webinar "The Employee Ownership Trust: An ESOP Alternative" by Christopher Michael (recorded May 18, 2021). Free for NCEO members.
- An Introduction to the Employee Ownership Trust, a comprehensive overview of EOTs globally by Graeme Nuttall.
- Recent developments in Colorado to support employee ownership, including EOTs. Non-members can view a recording of our July 26, 2021, Community Conversation or read the blog post. NCEO members can also view the article on Colorado’s employee ownership initiative in the August 2021 issues of our newsletter.
- Our blog post announcing the first EOT company in Australia, Meld Studios.
If you are interested in learning more, please contact Loren Rodgers at the NCEO.