This page is a starting point for business owners and leaders who want to explore whether an employee ownership trust (EOT) could be the right fit for them and their companies. The NCEO posted 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, Europe, and at least two US states.
What is an employee ownership trust?
An employee ownership trust 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 functionally very different from an employee stock ownership (ESOP) or worker cooperative, but many of the same goals can be achieved with these structures.
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. These purposes are effectively ranked in the trust documents.
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 most cases, the owner chooses to offer seller financing.
What kinds of companies set up EOTs?
An EOT can be a good fit for almost any kind of company, from startups to companies with thousands of staff and extensive fixed assets. In the US, EOT companies are 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.)
NCEO members can read a case study below.
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 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 of 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 are EOTs different from ESOPs and other forms of employee ownership?
Both EOTs and ESOPs involve trusts that operate in the interests of employees, but the differences between them are vast. One crucial difference is that ESOPs are created by Congress, which results both in significant tax incentives and 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.
Employee ownership can also be set up without creating a trust. See our pages on equity compensation plans and on other kinds of employee ownership options, including direct share ownership.
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.
Who's who in the EOT development space
- Service providers provide specialized expertise across multiple disciplines, including legal counsel, business consulting, trust design, governance planning, valuation, and financial advisory. For a comprehensive list of professionals and firms offering EOT-related services, see our Service Provider Directory and filter by “EOT” areas of expertise.
- State-level organizations and government offices in the US are beginning to provide resources and support for EOT transitions alongside their ESOP and worker cooperative programming. Contact your regional center to learn about local resources available for EOT exploration.
- For a comprehensive overview of organizations working across all forms of employee ownership, including EOTs, see our Who’s Who in ESOPs and Employee Ownership page.
How to learn more
Below are some resources you can consult to learn more about EOTs.
- Our book Using an Employee Ownership Trust for Business Transition is a detailed guide on EOTs and how to decide whether one is right for your company, focusing on the US.
- The NCEO offers a free EOT Peer Network for EOT companies, EOT prospects, and service providers on a monthly basis.
- The NCEO hosts its Annual Conference and Forum every year, with a special EOT Workshop at the Forum. Both events feature numerous learning and networking opportunities for those operating or interested in EOTs.
- An Introduction to the Employee Ownership Trust by Graeme Nuttall is a comprehensive overview of EOTs globally.
- A 2021 NCEO blog post announces the first EOT company in Australia, Meld Studios.
If you are interested in learning more, please contact Matt Licina at the NCEO.