Employee-owned companies put their employees in the driver's seat by giving them a stake in the business. Whether you're a family-run business or a large corporation, transitioning to an employee-owned model can lead to a more driven, engaged workforce and a stronger company culture.
If you're considering employee ownership, here's a look at some different employee-owned business models and how they impact employees and the overall organization.
What is an employee-owned business?
Employee ownership refers to an arrangement where no one person owns a majority of shares or holds control over an organization. Models can be as simple as granting workers stock shares or highly structured with democratic governance. You can form an employee-owned company during startup, transition to it after owning your business for a while, and even vote to change your worker-owned arrangement.
According to the Rutgers School of Management and Labor Relations, employee-ownership structures include one or more of the following concepts:
- Members have governance rights, giving them control over operational or strategic decisions.
- Employees own a substantial percentage of stock shares and benefit financially.
- The business mission focuses on worker benefits.
[Read more: The Most Common Business Entities for Startups]
Here are some of the largest employee-owned businesses in major industries, according to the National Center for Employee Ownership:
- Supermarkets and other services: WinCo Foods, Brookshire Grocery Company, Houchens Industries, and Harps Food Stores.
- Architecture and engineering: HDR Inc., Burns & McDonnell, Gensler, and Schweitzer Engineering Laboratories.
- Manufacturing: W.L. Gore & Associates and Holden Industries Inc.
- Tree and environmental services: Davey Tree Expert Company, Wright Service Corp., and Lewis Tree Service Inc.
- Engineering and construction: Black & Veatch, Performance Contracting Inc., and Austin Industries.
- Health care services: Acadian Ambulance and Bridges Health.
The most widely used employee ownership model, employee stock ownership plans (ESOPs), grants employees ownership interest by gradually allocating shares following vesting schedules based on years of service.
Employee ownership models
Your business can adopt one of several different employee ownership models depending on your scale, cash flow, and employee needs.
Employee stock ownership plan
The most widely used employee ownership model, employee stock ownership plans (ESOPs), grants employees ownership interest by gradually allocating shares following vesting schedules based on years of service. This model is ideal for established S and C corporations with more than 20 people and can be an effective succession planning strategy, as owners can transition their business's ownership or distribute wealth among employees.
Profits earned by the ESOP aren't subject to sales tax. Companies can also deduct principal and interest payments from loans taken out to purchase shares for ESOPs.
Worker cooperative
A worker cooperative is a business owned and operated by its employees who have an equal vote in company decisions and share profits. There are roughly 600 worker collectives nationwide, and they're popular among startups driven by a social mission.
Worker cooperatives distribute tax-deductible patronage dividends to employees based on hours worked, reducing their taxable income. For business owners, selling to a worker cooperative enables them to defer the capital gain tax payments.
Stock options
Stock options are a form of equity compensation in which employees gain company stock or a stock equivalent, either as a gift or through purchase.
While stock options don't offer tax benefits to employers, they help you provide additional compensation to employees without increasing payroll costs. You can determine the amount awarded, eligibility criteria, and vesting rules.
Employee ownership trusts
Employee ownership trusts (EOTs) are permanent arrangements that allow businesses to transition ownership to employees without the complexities and costs of ESOPs. For small or family-owned businesses looking to preserve their legacy, mission, and values during succession, EOTs protect the company from being sold to another buyer.
While EOTs don't offer the same tax benefits as ESOPs, the company's profit-sharing bonuses paid to employees are tax-deductible. However, employees pay taxes on the bonuses.
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Benefits of an employee-owned company
Though implementing an employee-owned business model is an investment, companies that make the transition can reap many benefits.
Jean Sand, Chief Financial Officer at furniture retailer Room & Board, said the company's transition to an ESOP was the "logical choice" to secure the future of the business while preserving its culture and serving the best interests of all its stakeholders, including staff members, vendors, business partners, customers, and the broader community.
"The announcement of the ESOP was met with so much excitement from our teams," Sand told CO—. "Our staff members are already so passionate and engaged in the business. [It was] really a build upon to the strong foundation of employee engagement that we already have."
Other benefits you can gain from becoming an employee-owned company include:
- Increased job retention: Employee ownership models often define a certain amount of time employees must remain with the company to receive benefits. This ensures people will remain invested in the company long term.
- Improved outcomes: Employee-owned companies drive results by rewarding employee contributions. The more a company earns, the more its owners benefit, so employees are incentivized to work hard and help the business grow.
- Easier succession planning: When employees own the company, it can help set your business up for future success since you won't have to look for an outside buyer when it comes time to exit.
[Read more: 6 Ways to Empower Employees in the Workplace]
How to implement an employee ownership model
When you're transitioning to employee ownership, Sand said it's important to take your time and be involved in the process.
"There are so many choices to make as you think about an ESOP program. It is important to understand how these choices will impact the company and the staff members well into the future," said Sand.
Sand also recommended choosing good partners to work with on the transaction.
"You want to make sure that they are knowledgeable about ESOPs but also understand your company culture to make sure that you design a program that aligns best with your company and objectives," she added.
CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.
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