Roughly 6,400 companies in America are employee-owned. They range from five employees to over 250,000, are headquartered in all 50 states, and operate at scale in every industry. One reason employee ownership has been so successful is flexibility. No matter the company size, sector, or lifecycle stage, there is an employee ownership structure that will work.
At Certified Employee-Owned, we champion all types of employee ownership. Our simple and clear definition of “employee-owned” sets a standard that can easily be applied to any business. As interest in employee ownership grows, we thought it would be helpful to outline the major ownership structures including:
- Employee Stock Ownership Plans (ESOPs)
- Worker Cooperatives
- Direct Share Ownership
- Employee Ownership Trusts (EOTs)
- Equity Compensation Plans
Employee Stock Ownership Plans (ESOPs)
Most employee-owned companies in the US have an Employee Stock Ownership Plan, commonly referred to as an ESOP. An ESOP is a retirement benefit plan that’s open to all employees and invests primarily in the employer’s stock. ESOPs operate like 401(k)s, holding stock in s special trust that an employee-owner can access when they retire.
Technically any business can have an ESOP but, due to the cost and administrative overheard, a company usually needs at least 30 employees for the plan to work. ESOPs can own any portion of a business and we’ve seen this percentage vary from 1% to 100%. Many large public companies have ESOPs that own a tiny fraction of outstanding shares, which is why it’s important to keep in mind that not all ESOPs are employee-owned.
ESOPs are popular because they have many benefits. They have substantial tax advantages. For example, a 100% ESOP-owned S-corporation is exempt from federal income tax. By law ESOPs are broad-based, which makes them inclusive. Employees do not need to make a financial contribution to receive their shares, participation is automatic, and all employees who work at least half-time and meet a certain age threshold are eligible for ownership.
Companies usually adopt an ESOP as a means of providing liquidity to selling owners. Based on an informal survey of our Members, we estimate that over 95% of ESOPs are created through conversion.
As of the date of this article there are 5,734 employee-owned companies with an ESOP. Notable examples include Wawa, WinCo Foods, and Davey Tree.
Worker Cooperatives
Worker cooperatives are democratically owned and governed by their employee-owners. Worker participation in governance is the hallmark of a worker cooperative and usually includes employees voting on the board of directors on a one-person, one-vote basis.
Worker cooperatives have a long history in the United States. There have been several waves of growth, including a large wave spanning the the 1970s and 1980s. Worker Cooperatives are currently in the midst of another wave spurred on by several development organizations including the US Federation of Worker Cooperatives (USFWC) and the Democracy at Work Institute (DAWI).
Unlike ESOPs, a substantial number of Worker Cooperatives are employee-owned from the very beginning. A 2021 survey run by DAWI found that 88% of worker cooperatives are the result of startups, and just 12% are the result of business transitions. Additionally, worker cooperatives are almost all 100% owned by employees, though occasionally a company transitioning to a cooperative might have a period of joint ownership with the departing owner.
Typically, worker cooperatives have eligibility requirements for becoming a worker-owner. This generally comes in the form of a waiting period of one to several years and a buy-in that ranges from a few hundred dollars up to a thousand. Not all coops have a buy-in, and those that do often offer worker-owners with favorable financing to encourage participation.
As of the date of this article, there are 400 worker cooperatives. Notable examples include Cooperative Home Care Associates, Evergreen Cooperatives, and A Slice of New York.
Employee Ownership Trusts (EOTs)
Employee Ownership Trusts (EOTs), sometimes referred to as Employee Ownership Purpose Trusts, are quickly gaining traction as an innovative employee ownership structure. Modeled off an approach pioneered in the UK by companies like John Lewis Partnership, EOTs have been growing in the US since 2016 thanks to the work of groups like EOT Law, Common Trust, and Purpose Owned.
EOTs are extremely flexible which allows selling owners to craft an employee ownership structure that closely aligns with their vision for the future. They are generally much less expensive than alternatives, especially ESOPs. And they can be set up to exist in perpetuity, which gives selling owners to confidence that their legacy of employee ownership will continue as long as their company continue to operate.
EOTs are still in the early stages in the US and unfortunately don’t yet benefit from tax incentives. Despite that headwind, today there are roughly two dozen EOTs in the US and that number grows every year. Prominent examples of EOTs include Arbor Assays, Bicycle Technologies International, Text-Em-All.
Direct Share Ownership
Direct share ownership is another flexible option for employee ownership. While larger companies are likely to choose an ESOP for tax reasons, smaller companies sometimes find distributing shares directly to employees as a better method for implementing employee ownership.
Direct share ownership has become increasingly popular thanks to Teamshares. Founded in 2019, Teamshares buys smaller companies and then sells the business back to employees over a 10- to 20-year time period. At this point we’re aware of 50 companies that use direct share ownership to achieve at least 30% employee ownership, and that number is growing rapidly.
Equity Compensation
Equity compensation incorporates stock-based employee benefits including stock options, restricted stock, RSUs, stock appreciation rights, and phantom stock. Equity compensation is typically given to the employee at no cost.
Equity compensation plans are popular ways to compensate executives and offer equity to employees at early stage startups because they are flexible and generally offer employees favorable tax treatment compared to giving them shares directly. Not many companies are using equity compensation to achieve 30% employee ownership, but there are a few and these structures offer a compelling option for newer companies that are growing and want a cheap, flexible way to bring early employees along as owners.
All of the structures in this article have unique strengths and weaknesses. But they work towards the same goal: changing the relationship between company and employee by giving everyone a chance to earn an ownership stake. No matter the size, sector, or lifecycle stage, there is an employee ownership structure that can help any company build a team of owners.
