- Retains businesses, preserves jobs, and anchors wealth in our communities.
- Improves company performance - Studies have consistently shown that employee-owned firms, on average, out-perform comparable companies: higher profitability and productivity, higher retention rates, and more resilience during economic downturns.
- Improves employee outcomes – Employee-owned companies (on average) pay higher wages, provide more (and better) benefits, and provide opportunities to build real wealth.
- Creates a viable (and tax-advantaged) ownership succession strategy for small businesses – Employee ownership provides a fair price for the business, can provide significant tax breaks for both the seller and the business, and can ensure the legacy of the business for generations.
Read on to learn more about common employee ownership models...
ESOPs are the most common form of broad-based employee ownership in the US. Currently there are roughly 6500 companies in the US have an ESOP; nearly 14 million American workers participate in them; and through them own more than $1.8 trillion in assets. ESOPs can be found in both private and public companies, and in every major industry group.
An ESOP is a qualified retirement plan, similar (yet different) to a 401k, that invests in the stock of the sponsoring company, and that stock is placed in an ESOP trust. Every year, the company makes a tax-deductible contribution to the ESOP which is then allocated to participating employees, typically through a formula. Unlike a 401k, employees do not (in fact cannot) make any contributions to the ESOP.
In addition to the contribution tax deduction, the ESOP’s status as a tax-exempt qualified retirement plan trust provides an additional benefit for companies that are also an S-Corp. The percent of the company that is owned by the ESOP operates free from corporate income tax. For example, an S-Corp that is 100% owned by an ESOP pays zero federal income tax – many states provide a similar benefit.
Business owners that sell at least 30% of their business to an ESOP can also take advantage of a significant tax benefit – the 1042 rollover on capital gains tax. Investing the proceeds from the sale can defer capital gains for the seller and provide a step up in basis for succeeding generations. The business owner has the opportunity to maintain (and continue) the legacy of the business while putting more money in their pocket.
As a qualified retirement plan, most ESOP participants begin to receive their ESOP benefit at normal retirement age. When that time comes, they will receive the vested cash value of the ESOP stock in their account, typically over a 5-year period.
Want to learn more? Contact the OEOC at oeoc@kent.edu for a free consultation.
Worker cooperatives are the next largest segment of employee-owned businesses in the US, with about 1000 cooperatives nationwide that have 10,000 employee owners. Even though the number of US worker cooperatives is relatively small, it is the most common form of employee ownership around the world.
Unlike an ESOP, a worker cooperative is a type of corporate entity (like an LLC or C-Corp) rather than an employee benefit plan. Worker cooperatives are one type in the family of cooperatives, like Land O’Lakes (producer cooperative, owned by farmers); ACE Hardware (shared service cooperative owned by the independent hardware stores); Nationwide (insurance cooperative owned by policy holders) or your local credit union (owned by depositors).
A worker cooperative is owned by the worker-members that are 1) employed by the company, and 2) become a member of the cooperative by paying the membership fee. Each member-owner has the opportunity to participate in the running of the business (including participating on and voting for the Board of Directors) as well as getting a share of company profits every year (called patronage or patronage refund). Employees can also build value in an internal capital account that is paid to them when they leave the company.
Worker cooperatives don’t qualify for as many tax breaks as ESOPs, but a major tax break it does qualify for is the 1042 Rollover selling owner benefit (outlined above in the ESOP section). Cooperatives are a good choice for businesses that are either too small for an ESOP, or wish to take advantage of the unique cooperative culture. They are generally much cheaper than ESOPs to implement.
Want to learn more? Contact the OEOC at oeoc@kent.edu for a free consultation.
A new form of employee ownership, popular in the United Kingdom and just beginning to catch on in the U.S., is the Employee Ownership Trust (EOT). Nationwide, there are probably a dozen or more EOTs in existence, though they are growing in number.
These companies are owned by a trust, established by the selling owner, with the requirement that the company is operated for the benefit of the employees. A commonality among EOT's is that most have language in the trust document that states that most or all the profits (above those needed for reinvestment in the business) go to the employees. Employees are beneficiaries of the trust during the time they are employed but have no shares of ownership or equity in the company. For that reason, EOT's are thought of as more of a profit-sharing model than an equity model.
Some businesses choose a perpetual form of trust (depending on state law) to ensure that their business will remain employee owned in perpetuity. EOTs do not offer any tax benefits for the selling owner or the business but are significantly less expensive to create and administer than ESOPs and provide more flexibility in governance structure compared to worker cooperatives.
Want to learn more? Contact the OEOC at oeoc@kent.edu for a free consultation.
Contact the OEOC at oeoc@kent.edu for a free consultation with our professional staff.
Established in 1987, The Ohio Employee Ownership Center is a nonprofit outreach center of Kent State University that supports businesses across Ohio and around the world by its efforts that are proven to save jobs, create wealth, and grow the economy. The OEOC’s work rests on a simple philosophy: broader ownership of productive assets is a good thing for employees, communities, and our country. Since our founding, have worked with over 700 business owners to provide succession planning support, 100 of which implemented complete or partial employee ownership. We also provide an extensive range of training and education programs for existing employee-owned companies through Ohio's Employee-Owned Network.
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