Transitioning Your Venture
Brief pointers for business owners looking to have an exit strategy
In this article, you will learn about transitioning to an employee-owned business. As listed in an Economic Growth Institute publication, there are unique characteristics for certain structures such as employee ownership trusts (EOT), worker cooperatives, and employee stock ownership plans (ESOP). Let’s dive in!
Employee Ownership Trust (EOT): An employee ownership trust is a form of perpetual trust. Usually for EOTs, minimal changes are needed. The ownership is collectively held in a trust on behalf of the employees. The transition process is simpler and can be gradual. The level of participatory decision-making can vary based on the trust’s structure. EOTs generally have simpler regulatory requirements compared to ESOPs. They ensure that employees have a share in profits, a voice in governance, and contribute to preserving the business’s mission for future generations. Similar to worker cooperatives, EOTs are suitable for companies of all sizes. Employee vesting periods in EOTs happen over time, usually not exceeding six years. Employees receive their distributions from the trust upon retirement, resignation, or other events. This structure aligns with the goal of fostering long-term employee engagement and shared ownership benefits.
Worker Cooperatives: Ownership is directly obtained by employees with voting rights. Compliance here may vary but typically involves adherence to cooperative principles and local regulations. Worker cooperatives offer direct and active participation in decision-making processes. Every worker has one equal voting right! There may be certain criteria for member eligibility such as hours worked per year, minimum work tenure, and so on. Worker cooperatives often have a board of directors that oversee the strategic direction of the company and can also make decisions on behalf of the employees. These are also appropriate for companies of all sizes. As for profit sharing, they are shared among the workers based on different factors that may include hours worked or salary. Here, workers can contribute to the capital of the cooperative which can come from internal or external sources. The overall fundamental principle of worker cooperatives is the democratic control and shared ownership of the business, promoting a participatory and inclusive work culture.
Employee Stock Ownership Plans (ESOPs): These are the most common type of employee ownership. Different from an EOT, ESOPs are more complex. ESOPs involve adjusting to comply with new labor and tax regulations, potentially necessitating changes to the corporate structure (C-Corp, S-Corp). Ownership in ESOPs is through a trust that holds shares on behalf of employees, with voting rights often proportional to their shares. ESOPs, unlike EOTs, are created by Congress, leading to tax incentives and regulatory requirements. Setting up an ESOP requires the company to establish a benefit plan and finance it with company stock, funds allocated to company stock, or a combination of both. Typically, employees do not make personal investments, and vesting occurs gradually, with full vesting mandates within a maximum period of six years.