Types of Employee Ownership
In the following pages various methods of employee ownership; Employee Stock Ownership Plan (ESOP), Employee Ownership Trust (EOT), Cooperative, and Direct Ownership and Alternatives are described in more detail. Here is a summary of the situations where each one is the best fit.
Where is an ESOP a good fit?
Good for company with over 15 employees and annual revenue over $ 2 million
Can own any percentage of company
Seller and company have tax deduction appetite
Regulation by Internal Revenue Service (IRS) and US Department of Labor (DOL) is acceptable
Annual independent valuation is acceptable
Trustee decides about sale to outsider
May have substantial or limited employee voting and voice
Most employee ownership in US involves ESOP
Where is Worker Co-op a good fit?
Works best in small companies
Where 7 co-op principles fit the culture
Capital gains deferral available for selling owner
Harder to raise capital due to co-op member control rules
Workers are the owners & not subject to oversight by a trustee
Tax pass-through to workers like other co-ops
Usually include all full-time workers & majority ownership
One vote per person
Member super-majority vote on selling to non-member outsiders
Where a worker co-op is being organized in a new industry with community and union support - See example PVD Flowers
Where is an Employee Ownership Trust (EOT) a good fit?
Where Seller and company are interested in sale to employees:
without creating a pension plan
without creating repurchase liability on employee stock
not expecting exit for the employee owners by reselling the company or otherwise making resale more complex
not concerned that employees won’t actually own stock
Where Seller is:
not motivated by tax deductions
committed to making the company permanently employee owned
comfortable with using a UK trust or out of state trust law
open to being a pioneer if using a US trust law
Where is an Employee Ownership Group (EOG) a good fit?
An EOG is usually done using a phantom stock plan or stock appreciation rights plan including profit sharing and the employee governance in the company governance documents. There is no federal or state trust. (Coming soon in the Case Studies section of this website there will be an example of the EOG we created at Good Roots, Inc.)
An EOG fits well where the company and its shareholders:
want a simple form of employee ownership that is not necessarily perpetual
are willing to put employee governance rights in its bylaws and articles of incorporation
want the employee group to have a representative on the board.
want employees to have profit sharing
want employees working at the company upon a sale to share in the proceeds of that sale
An EOG is usually done using a phantom stock plan or stock appreciation rights plan including profit sharing and the employee governance in the company governance documents. There is no federal or state trust. (Coming soon in the Case Studies section of this website there will be an example of the EOG we created at Good Roots, Inc.)
Where are other alternatives best?
There are companies organized in unique ways for whom none of the above is a great fit. For them something else must be devised. Our firm is known for creating such structures.
Zingerman’s Community of Businesses (ZCOB), which has a non-legal governing body that operates on consensus, did not want to roll its 11 businesses up as subsidiaries of a corporate parent to use an ESOP; and its Path to Partnership structure did not fit the co-op model. So we helped them devise an arrangement that permits every employee in the 11 companies to buy shares in ZCOB’s shared intellectual property company while retaining the different equity interests of the partners who have been the entrepreneurs of each of the separate businesses.
In the early days of ESOPs, it was unusual to create:
a highly democratic, co-op type, of ESOP that provided for one-vote-per-person; which we did for Republic Container, North Coast Brass, and Carris Reels;
a salary cap for share allocation below the legal limit, as we did for Republic Container;
slate voting to balance union and management interests as we did in Maryland Brush.”
EMPLOYEE OWNERSHIP THAT FITS YOUR NEEDS
We can smoothly transition your privately-owned business to a worker-owned one that meets the seller’s objectives, is socially responsible and includes employee participation. Learn more
TESTIMONIAL
“Before the ESOP, we had 100% employee turnover in our Michigan and North Carolina facilities. Now that the ESOP owns the company, turnover is 20% company wide. Although many of our jobs are physically demanding, our company has become an employer of choice.” -David Fitzgerald, CFO, Carris Reels
