What is Employee Ownership Trusts?
Employee ownership trusts are a type of trust that can provide employees with an ownership stake in their employer. This can help to promote loyalty and creativity among employees, while also increasing the efficiency and effectiveness of the organization.
Employee ownership trusts can be created through a variety of methods, including gifts or inheritances, and they offer a number of benefits for both the employee and the organization.
It is a challenging time for business in the UK at the moment, as markets continue to struggle under the weight of a growing financial crisis. Recession fears abound as the interest rate rises to 1%, and the pound tumbles over rising inflation.
Business ownership is a difficult topic to broach in such a dire financial landscape, but there are options available to business owners and shareholders that can not only maximise value, but also benefit the workforce – a key example of which can be found in the form of an Employee Ownership Trust.
What is an Employee Ownership Trust?
An Employee Ownership Trust, or EOT, is a form of agreement whereby a majority of shares in a business are sold to a trust, which represents the working population of the business. The trust grants a business’ employees ownership of the business, giving them the power to influence its direction and also an opportunity to profit from the company’s continued success.
The concept of the EOT was formally introduced by the UK government in 2014, as part of the Finance Act. The legislation was designed to incentivise increased uptake of employee ownership models across the UK, in line with popular retailer John Lewis’ corporate model. The legislation includes direct incentives for shareholders and business owners, as well as enshrining employee rights and rewards.
In order to quality as an Employee Ownership Trust, the trust needs to be sold more than 50% of the company’s total shares. As such, not every shareholder needs to sell their stake.
Instead, many business owners use this as an opportunity to ‘cash out’ of their business; selling shares to an EOT has tax benefits, in the form of an exemption from Capital Gains Tax. In this way, EOTs represent a powerful way for shareholders to liquidate assets, and a useful method to accede ownership.
What Does an EOT Mean for Employees?
An Employee Ownership Trust does not mean the direct distribution of shares to employees on an individual basis. Rather, the shares are pooled in a central trust that operates on behalf of the employees, allowing them to have a collective impact on the company’s direction and future.
This indirect stake in the business may not have immediate financial implications for employees, but allows them access to long-term benefits – including a tax-free annual bonus of up to £3,600. The trust also enables the employees to benefit from the company’s overall success, as the trust’s company stake appreciates in value alongside the growth of the company.
Benefits of Employee Ownership Trusts
Employee-owned businesses are more successful and productive than conventional businesses. A study by the National Center for Employee Ownership found that employee-owned businesses have outperformed the S&P 500 stock index by 2 to 1 over the past decade. Furthermore, employee productivity is 14% higher in ESOPs (employee stock ownership plans) than in traditional firms.
Drawbacks of Employee Ownership Trusts
Employee ownership trusts (EOTs) are a popular way for employees to become owners of their company. EOTs can provide many benefits to employees, including making them more invested in their work and increasing their job satisfaction.
However, there are also several drawbacks to EOTs. One potential drawback is that employees may not have as much control over the company as they would if they were owners outright. Additionally, if the company is struggling financially, employees may be at risk of losing their jobs.
In conclusion, employee ownership trusts are a great way to give employees a sense of ownership in the company and provide them with a retirement plan. They are also a tax-advantaged way to hold company stock. If you are thinking of setting up an employee ownership trust, talk to an attorney or financial planner to learn more about the process.