Should your company become employee owned?

Employee Ownership Trusts (EOTs) can be the right move for certain companies and can drive, motivate and reward staff.

They generally offer businesses the option of selling to employees with attractive tax incentives alongside the chance to scale up or change structure.

Results show employee ownership is no barrier to growth or success – rather the opposite, with employee owned companies going from strength to strength. They regularly outperform their independently owned peers in revenue growth, profits, job creation and productivity.

Rebecca Robinson, director in the company commercial team at Wake Smith Solicitors looks at how there can be benefits for the business owners, shareholders and staff.

This article covers:

• What is an Employee Ownership Trust (EOT)?
• What criteria do I need to meet to operate an EOT?
• Advantages of an EOT
• Disdvantages of an EOT
• Is an employee ownership trust right for my business?
• How we can help

What is an Employee Ownership Trust (EOT)?

An Employee Ownership Trust is a specialist form of an employee benefit trust, introduced ten years ago by the government in 2014.

Shareholders are encouraged to sell their shares into a trust which is held on behalf of the employees of a company.

It can be used in business succession strategies, but also if a business wants to scale-up or change its structure.

What criteria do I need to meet to operate an EOT?

• The company whose shares are transferred must be a trading company or the main company of a trading group.
• All employees must benefit from the EOT. This does exclude any employees who already holding five per cent or more of the share capital in the business at the time the trust is set up.
• The trustees must retain, on an ongoing basis, at least a 50 per cent controlling interest in the company.
• The tax reliefs are subject to these conditions, especially the 50 per cent controlling ownership.

Advantages of an EOT

• A greater involvement in the business has shown to make employees more motivated, increase retention rates and enhance recruitment rates.
• A reduction in absenteeism.
• Tax-free bonuses for employees - companies co-owned by EOTs are also able to pay tax-free cash bonuses to their employees of up to £3,600 per employee per year.
• Co-owned companies can be more successful, profitable and sustainable as employees want to contribute to the company’s success.
• Loyal staff can be rewarded.
• The business owner can pass on the culture and values of the business before leaving, often improving long term decision making.
• Shareholders can get a full Capital Gains Tax exemption - if you own a trading company, you can now sell some, or all of your shares to an employee ownership trust for full market value without any CGT liability.
• Quicker and smoother sales due to fewer negotiations with a third party purchaser.

Disadvantages of an EOT

• There is no full control due to the indirect ownership nature of the agreement. Trustees are there to make sure the company is being led competently, ensuring employee commitment and engagement, not to manage the company.
• Money from an EOT is paid to shareholders over time rather than straight away as it would in a market sale, so they take on more risk.

Is an employee ownership trust right for my business?

They can work for business owners who are looking at retirement and are interested in another form of succession plan.

Although advantageous for some companies, they’re not necessarily the way forward for some businesses, where a trade sale or management buy-out (MBO) might be more suitable.

Your next move?

Read about a recent EOT we advised on here: Sheffield drill bit manufacturing company becomes employee owned or Find out more about our Company Commercial services

Before you decide on an EOT please contact Rebecca Robinson at Wake Smith Solicitors on 0114 224 2007 or email [email protected] 

Posted 16/12/2024