What Are Employee-Owned Companies?

 Finding top talent and keeping them is tough, especially for small businesses and startups with limited capital. But what if there was a way to attract top employees and keep them around long-term?

Or better yet, incentivize them to work hard and help your business grow?

One way to achieve this is by transforming your business into an employee-owned company. The structure allows everyone to share in the fruit of the business’s success, fosters cohesiveness, and helps ensure the longevity of your venture. 

What Does an Employee-Owned Company Mean?

An employee-owned company is a business with at least 50% of its shares owned by its employees. This type of ownership structure gives employees a say in business decision making and a greater stake in the company’s success.

The better the company performs, the higher the employee’s share of profits. In some cases, hourly or salaried employees have become millionaires after the sale of a company. 

Some employee-owned company models even allow employee-shareholders to vote for the board of directors.

Employee-Owned Company vs. ESOP

An employee-owned company is an umbrella term for a business that allows its workers to earn or purchase shares or decision-making power in its organization. 

An ESOP (employee stock ownership plan) is one type of employee-owned company model that businesses can use to set up equity and profit-sharing for workers.

Employee-Owned Business Model

The employee-owned business model is a business structure in which employees own most or all of the company’s shares. Employee-owners often get a vote in company decisions and can benefit financially from the company’s profits.

But there’s no one way to operate an employee-owned company. Here’s an overview of a few business models:

• Worker-owned cooperatives: Members each get one equal voting right, regardless of seniority or position in the company, and elect board directors. Workers are not required to join — but to become a member, they must buy a share of the business.
• Employee stock ownership plans (ESOPs): A retirement benefit plan available to all workers. Employee-owners accrue shares as they work and receive them in cash after leaving the company. Workers may also receive voting power in company decision-making.
• Employee ownership trusts (EOTs): Employees own shares of stock in the company, but have no control over its operations. However, employee-owners can choose the board of directors. The trust holds the shares on behalf of the employees and distributes profits to them.

How Employee-Owned Companies Work

Each type of employee-owned company model comes with eligibility requirements, structures, and legal guidelines or state requirements. So it’s important you do your due diligence to see which best suits your small business. 

Here’s an overview of how the most popular employee-owned business models operate. 

Worker-owned cooperatives

Worker-owned cooperatives are 100% employee-owned businesses. The employees own company shares and directly control business operations. Each member has one equal vote in business decisions, regardless of how much money they’ve invested or how many hours they work.

As of 2021, there are over 600 worker-owned cooperatives in America with 5.9k+ participants.

Workers in an employee-owned co-op don’t have to become members, and many businesses require employees to work for a certain amount of time before they’re eligible. At this point, members of the co-op may vote on whether an employee can join (though some co-ops don’t do this). 

Members may block certain types of employees from joining, such as seasonal workers and upper management personnel. 

At the end of the year, net revenue is split between two accounts: a general account used by the business to purchase equipment and pay bills and other expenses, and one for the co-op members. 

Net revenue generated by nonmember employees goes into the general account, while the net revenue members earn is split between the general account and members’ individual accounts. If the business is in a rut and needs more money, less money may be distributed to the members. 

Profits are shared between members based on how many hours they worked (most common) and/or other criteria established in the company’s bylaws. 

Employee stock ownership plan