Employee ownership means that a company’s employees have a stake in the business. The most common form in the U.S. is an employee stock ownership plan (ESOP), which is a qualified retirement plan that invests primarily in company stock. Other models include employee ownership trusts (EOTs) and worker cooperatives, each with different structures, tax treatments, and cultural implications.
All of these structures can provide financial benefits, support company values, and contribute to long-term employee engagement, but EOTs and worker co-ops aren’t ERISA-regulated as qualified retirement plans, as an ESOP is.
IRS Definition of an ESOP:
“An employee stock ownership plan (ESOP) is an IRC section 401(a) qualified defined contribution plan that is a stock bonus plan or a stock bonus/money purchase plan. An ESOP must be designed to invest primarily in qualifying employer securities.” — Internal Revenue Service
For the people who work at employee-owned companies, ownership often feels personal. It means having a voice, a stake in shared success, and the chance to build wealth through everyday work. Whether it’s a machinist who sees their retirement grow with each good year or a software developer motivated by more than a paycheck, employee ownership gives work a deeper purpose — and creates lasting connections between people and the businesses they help build.
Multiple Paths to Employee Ownership
While ESOPs are the best-known and most structured form of employee ownership, they’re not the only option. Here's a look at the most common models:
1. Employee Stock Ownership Plans (ESOPs)
ESOPs are qualified retirement plans governed by federal law. Company shares are held in a trust and allocated to eligible employees, typically without requiring them to invest their own money. When an employee leaves or retires, the company buys back their shares.
- Tax-advantaged: 100% ESOP-owned S corporations are not subject to federal income tax — and often no state tax
- Ownership mentality: Studies show ESOPs improve financial security, retention, and productivity
- Wealth building: Workers had median ESOP account balances of $80,500, compared to median retirement savings of $30,000 among the general population
2. Employee Ownership Trusts (EOTs)
EOTs transfer partial or full ownership to a perpetual trust that holds the company for the benefit of employees.
- Not a retirement plan: Employees don’t receive shares, and no repurchase obligation exists
- Annual profit sharing: Employees benefit through yearly distributions
- Flexible governance: Can incorporate employee voice and values in governing documents
- Lack of tax parity: EOTs do not carry the same standardized tax advantages as ESOPs
3. Worker Cooperatives
Worker co-ops are democratically governed businesses where worker-owners purchase shares, and each worker-owner typically has one vote.
- Employee investment required: Workers often purchase shares or membership after a probationary period
- Shared profits and risks: Cooperatives emphasize equality and participation
- Limited scalability: More common in small or mission-driven enterprises
4. Equity Compensation Plans
These include stock options, restricted stock, stock appreciation rights (SARs), and employee stock purchase plans (ESPPs). While they give employees a chance to benefit from company growth, they don’t usually provide meaningful ownership or governance participation.
Comparison: ESOP vs. EOT vs. Worker Co-op
| Feature | ESOP | EOT | Worker Co-op |
| Legal Definition | Federally defined under IRC §401(a) | No statutory definition in the U.S. | No statutory definition in the U.S. |
| Tax Advantages | Yes – significant for C- and S-corps | No federal tax advantages | Limited; co-op tax rules vary |
| Employee Investment | No | No | Yes – Typically require |
| Governance | Trustee holds voting rights | Trust acts on behalf of employees | Democratic (one person, one vote) |
| Wealth Accumulation | Via retirement plan shares | Annual profit-sharing distributions | Profit-sharing plus capital gains upon exit |
| Exit Planning Fit | Versatile – especially strong for owner retirement and long-term succession | Suitable for long-term stewardship | Values-driven, often smaller companies |
Why Employee Ownership Matters
Employee ownership can be much more than a financial arrangement. For many organizations, it’s a business philosophy that drives performance, purpose, and people-first leadership. Whether structured as an ESOP, EOT, or co-op, employee ownership models can profoundly influence company culture, retention, and long-term success.
ESOP Benefits for the Selling Business Owner
Selling to an ESOP offers more than a liquidity event. It’s a succession strategy that preserves the company’s legacy, protects jobs, and rewards the team that helped build the business:
- Tax-efficient exit: Owners of C corporations may defer capital gains taxes under IRC §1042. S corp ESOPs avoid federal income tax altogether when 100% employee-owned
- Legacy preservation: Unlike third-party buyers or private equity, an ESOP keeps the business rooted in the community and aligned with its founding mission
- Flexibility: Business owners can sell gradually or in phases, transitioning control at their own pace
ESOP Advantages for Employee-Owners
Ownership gives employees more than a paycheck; they get a personal stake in the company’s success and a clearer path to building financial security:
- Retirement wealth: ESOP participants often accumulate retirement balances that far exceed those in traditional retirement savings plans
- Job security: Employee-owners at ESOP companies enjoy lower rates of layoffs and furloughs than non-ESOP employees
- Engagement and loyalty: Employees who are owners think and act like owners — and their voluntary quit rates are far below the national average
ESOP Business Benefits
A culture of ownership transforms how a business operates, from decision-making and innovation to customer service and profitability:
- Productivity boost: Numerous studies have shown that employee-owned companies outperform non-employee-owned peers in metrics like revenue growth, profit margins, and innovation
- Recruitment edge: Offering ownership is a differentiator in competitive talent markets, signaling long-term investment in employee well-being and career growth
- Stronger culture: Ownership mentality drives collaboration, accountability, and pride — qualities that fuel performance and attract like-minded talent
Employee ownership creates a flywheel of trust, transparency, and shared success — one that drives resilience and value over time.
Final Thoughts
Not every business is suited to every model of employee ownership. But ESOPs remain the most clearly defined, federally tax-advantaged, and scalable model available in the U.S.
EOTs and co-ops offer mission-driven alternatives, especially where governance participation and shared stewardship are priorities. However, ESOPs’ legal and regulatory clarity, along with strategic tax advantages, make ESOPs a trusted and strategic exit plan.
Ready to explore the right path to employee ownership for your company? Download our guide, What to Expect After the Transition to an ESOP Company, or head over to our free self-assessment quiz and see if an ESOP is right for you.
