Employee ownership has been building historic momentum throughout the North American economy.  

As an increasing number of business owners pursue retirement, more companies are looking at employee ownership as an alternative to traditional succession options, such as selling to an outside third-party buyer. Employee ownership has also become a more common element of talent management strategies, including in the private equity industry where a growing number of firms are introducing broad-based equity incentive plans in their portfolio companies. This momentum is further encouraged by both national and local governments who see the potential for employee ownership to build stronger and more resilient economies.  

This article is part of a series to help deepen your understanding of employee ownership and identify how it could help you achieve your goals. In this article, we will examine:

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  What employee ownership is

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  When companies should consider employee ownership

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  The types of employee ownership structures available in the U.S. and Canada

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  Employee ownership benefits

We consider employee ownership to be a broad-based strategy to benefit most, if not all, of the workforce. It can give employees ownership directly (by holding shares personally) or indirectly (via a trust or through equity programs such as stock options). There are multiple structures for transitioning to employee ownership, and many do not require employees to contribute their own money to buy shares.

The two most common situations to consider employee ownership are in an ownership transition or as a part of a talent management strategy.  

Every privately held business will have to transition ownership at some point. In the U.S., 73% of privately held business owners plan to transition ownership within the next decade. Similarly, in Canada, 76% of business owners plan to exit within the next 10 years. While in today’s market it’s most common for business owners to pursue a sale to a traditional buyer, such as a private equity firm or strategic buyer, employee ownership may be the best solution for business owners who are focused on protecting their legacies and rewarding employees and their communities.

Employee ownership can also be used to attract, retain and align employees through smaller scale incentive plans, even if existing shareholders are not looking to exit the business. In the technology industry, stock option type plans have been used for decades. In recent years it has also become more common for private equity firms to offer similar types of plans. 

There are four general categories of employee ownership plans in North America:  

1. Stock option plans (and other forms of synthetic equity)

   1. There are a number of other models in this category, including Share Appreciation Rights. Each of these operate similarly in that employees participate in the growth of the company’s share price. The specific plan that is chosen is often driven by tax considerations specific to the company and its employees.

2. Share purchase plans (direct equity ownership)

3. Worker cooperatives  

4. Trusts, including Employee Stock Ownership Plans (ESOPs) in the U.S. and Employee Ownership Trusts (EOTs) in both the U.S. and Canada

While there is limited data available, stock option plans and other forms of synthetic equity are generally considered to be the easiest employee ownership models to implement. In these plans employees typically benefit from the growth in the value of the company’s shares and do not contribute any cash or hold shares directly. These plans are well suited for any company that is experiencing share price appreciation, even if they have significant cash constraints. Most companies that utilize these plans are pursuing a future sale of the company in which all shareholders can receive liquidity.

A company’s board of directors has discretion on which employees can benefit from a stock option plan. This can result in only key executives receiving the benefits or every employee receiving some level of ownership benefit. The broader based the plan, the more likely the company is to experience the full benefits of an ownership culture.

Share purchase plans are designed to encourage employees to purchase shares in the company. This can be facilitated through payroll deductions, personal loans provided by the company or through an outside lender. Under these plans, employees hold the shares directly and may be party to a shareholder’s agreement. While there are many approaches to share purchase plans, in private companies it’s especially important to ensure that employees fully understand the risks related to personal loans as well as illiquidity.

A worker cooperative is a company owned and controlled by employee members. Commonly, the majority if not all of employees participate by purchasing membership interests in the cooperative, often for a nominal amount. Worker cooperatives adhere to a one worker, one vote governance model. As members they can participate democratically in decision-making and/or vote to elect management and the board. The board is often composed primarily of the employee-owners, and the profits are shared based upon a customizable formula. In the U.S., estimates suggest there are between 750 and 1,300 worker cooperatives with a median of six employees, while in Canada, there are approximately 386 worker cooperatives with an average of 15 employees.

The use of trusts to facilitate employee ownership has a long history in the U.S. and have recently been introduced in Canada. Functionally, the use of trusts for employee ownership is similar in both countries. A trust is created with employees as the designated beneficiaries. That trust then purchases the company’s shares on behalf of the employees. Employees rarely, if ever, make any cash contribution. Instead, the company will typically borrow to facilitate the purchase. While the employees are the economic beneficiaries, they are not necessarily the legal holders of shares. As a result, the governance models vary.

An ESOP in the U.S.  is a qualified retirement plan primarily invested in company stock and can acquire anywhere from 1% to 100% of a company. ESOPs offer corporate and personal tax benefits, especially 100% S corporation ESOPs, which are exempt from federal income tax. If structured properly, owners can defer capital gains taxes on the sale. ESOPs have been used in the U.S. since the 1950s. Today, nearly 6,000 private companies are ESOP-owned.

Due to their retirement plan status and tax advantages, ESOPs require strict compliance and carry higher annual costs. All full-time employees benefit, receiving annual share allocations that fluctuate with company performance. The company must repurchase shares from departing employees, creating a cash obligation that requires careful management. Many ESOP companies also offer synthetic equity plans to incentivize key leadership.

In 2024, Canada passed legislation approving EOTs. There are several core differences between the Canadian EOT and the U.S. ESOP.

1. There are two tax incentives in Canada focused on the selling business owner, but no corporate tax savings. Those tax incentives include CA$10 million in capital gains relief and an extended capital gains reserve, which effectively allows for tax to be deferred.

2. The Canadian EOT requires a sale of a controlling interest, which restricts minority transactions and has various governance implications.

3. The Canadian EOT is designed to provide dividends to employees, rather than shares in the trust, which means shares do not necessarily need to be repurchased in the future. It’s possible to provide shares in the trust or through an outside plan, but there are some added complexities in doing so.

4. Because the Canadian EOT is not a qualified retirement plan, it requires a lower level of regulation.

While ESOPs are more commonly used in the U.S., EOTs are also available. Similar to Canada, U.S. EOTs are designed to provide a dividend sharing interest to employees. However, there are currently no dedicated tax incentives for EOTs in the U.S. (but also no added regulatory burden).

*Many of these employee ownership can be used as both a talent management and ownership transition strategy.

Employee-owned businesses have been studied for decades, and research has shown a broad range of positive outcomes including:

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  Stronger operating performance. On average companies experience higher sales growth and increased productivity.

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  Improved talent retention. Voluntary quit rates are one-third of the national average.

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  Greater resiliency during economic downturns. Layoffs at employee-owned businesses are a quarter of the national average.

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  Enhanced financial security for workers. Employee owners have more than double the retirement savings of their non-employee owner peers.

For more information on the research on employee ownership, please visit the National Center for Employee Ownership (NCEO) research hub (Employee Ownership Research & Data).

Given the many structures available, employee ownership is an option for any company regardless of the stage, size or industry. Whether you’re a business owner considering retirement or an executive looking to create a talent advantage, there may be an employee ownership solution that can help you achieve your goals.