Employee Ownership Trusts: An Emerging Succession Option for U.S. Business Owners

Business owners have more than one way to transfer a company. A third-party sale, family transfer, management buyout, employee stock ownership plan, worker cooperative, or employee ownership trust may each serve a different goal.

Why owners consider an employee ownership trust

An employee ownership trust, or EOT, is an emerging U.S. structure in which a trust owns some or all of a business for the benefit of its employees. Unlike an employee stock ownership plan, an EOT generally does not allocate individual retirement-plan accounts to employees. The trust holds the ownership interest collectively and follows the governance and benefit rules written into the trust documents.

An EOT may appeal to an owner who wants to preserve the business, reward employees, and reduce the likelihood of a later sale to an outside buyer. The structure can be flexible, and employees generally do not have to contribute cash to become beneficiaries.

That flexibility also means the documents matter. The trust must address who appoints and removes trustees, how employees participate in governance, how profits are used, what happens if the business struggles, and whether the company can later be sold.

An EOT is not an ESOP

An ESOP is a federally regulated, tax-qualified retirement plan. An EOT is generally governed by state trust law and is not itself a federally regulated retirement plan.

That distinction matters when discussing taxes. Federal tax provisions may provide benefits for certain qualifying ESOP or worker-cooperative transactions, but a U.S. EOT does not automatically create a capital-gains exemption for the selling owner. Any tax projection should be reviewed with qualified tax counsel and a CPA before the owner commits to the structure.

Questions to answer before moving forward

Before choosing an EOT, an owner should evaluate:

1. Whether state law supports the intended trust structure and duration.

2. How the purchase price will be valued and financed.

3. Whether the business can service acquisition debt while continuing to invest and operate.

4. How employees will benefit and participate in governance.

5. What fiduciary duties will apply to trustees and company leadership.

6. How the EOT compares with an ESOP, cooperative, family transfer, management buyout, or third-party sale.

7. How the transition coordinates with the owner's estate plan, buy-sell arrangements, insurance, and long-term wealth-transfer goals.

Build the transition before it becomes urgent

Employee ownership is not a one-size-fits-all solution. The right path depends on the owner's goals, the company's cash flow, the management team, the workforce, the governing state law, and the tax consequences.

The practical first step is a coordinated feasibility review involving business counsel, tax counsel or a CPA, and qualified valuation and financing professionals. That review can help the owner compare structures before signing a letter of intent or committing the business to a transition it cannot support.

Sources and further reading

U.S. Department of Labor employee ownership guidance: https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/programs-and-initiatives/employee-ownership-initiative/tools-and-resources/employee-ownership

IRS Publication 550: https://www.irs.gov/publications/p550

This article provides general information and is not legal or tax advice. The law and available structures vary by jurisdiction and by the facts of each transaction.