Employee Ownership
Housed in the Colorado Office of Economic Development and International Trade, the Employee Ownership Network brings together subject matter experts such as employee-owned businesses, attorneys and economic development experts to promote employee ownership in Colorado. Employee-owned businesses promote a higher quality of living for the employee-owners themselves – including higher wages and a longer job tenure — and secure greater economic stability for the communities.
ABOUT THE EMPLOYEE OWNERSHIP COMMISSION
The Commission on Employee Ownership was established on April 10, 2019 by Executive Order. Governor Polis established the commission to support the Employee Ownership Network by:
- Establishing a wide-reaching network of technical support for businesses wanting to become employee-owned;
- Educating businesses and communities on the benefits of becoming employee-owned businesses;
- And finally, identifying — and ultimately removing — any barriers to the development and advancement of employee-owned businesses.
WHAT CAN EMPLOYEE OWNERSHIP DO FOR YOU?
PROVIDE AN EXIT STRATEGY.
In almost every small business, the owner or owners will eventually want to leave. Selling the business to employees can be a way to provide continuity and preserve the culture of the business.
ATTRACT AND RETAIN GOOD EMPLOYEES.
Many small businesses have trouble attracting and retaining good employees. Using employee ownership as an employee benefit can be an important way to address this problem.
IMPROVE PERFORMANCE.
Several reliable studies indicate that, on average, employee-owned firms perform substantially better than non-employee-owned firms when ownership is combined with employee participation in decisions affecting their work. A survey published in the ESOP Report (August 2003) revealed that ESOP companies outperformed the three major stock indices in 2002: the Dow Jones Industrial Average, the NASDAQ composite, and the S&P 500. This means “once again that the decision to become employee-owned through an ESOP means better company performance and greater wealth creation for the employee owners.” (ESOP Report 8/03).
IMPROVE WAGES AND BENEFITS.
Employee-owned businesses tend to pay higher wages and provide better benefit
PROVIDE TAX BENEFITS.
Certain employee ownership structures qualify for tax benefits, which can be substantial.
TYPES OF EMPLOYEE OWNERSHIP
The two primary forms of employee ownership are Worker Cooperatives and Employee Stock Ownership Plans (ESOPs).
What is a Worker Cooperative?
- Cooperatives are member-owned companies in which governance control is on a one person/one vote basis. In a worker cooperative, only those who work in the business are eligible to become members.
- Operational decisions can be participatory or more conventionally hierarchical.
- Cooperatives are typically set up as corporations, and in some states, there are worker cooperative statutes.
- Workers who are members are equal owners, elect the board, and vote on major company decisions on a one-person/one-vote basis.
- Members receive a share of any annual net income, usually distributed on the basis of hours worked.
How Does a Cooperative Work?
- Typically, employees become eligible for membership after working for the business for a period of time specified in the bylaws.
- After the employee has been accepted for membership, they purchase a membership share which, in most cases, has a fixed value.
- Most cooperatives establish an internal account for each member to which their share of net income is allocated, in proportion to hours worked or some other equitable measurement of their contribution. This share of income is deductible to the company, but taxable to the employee.
- When employees leave, the co-op buys back their membership share and pays out their account balances. While members are employed, the cooperative must pay out at least 20% of their annual patronage allocation in cash, in order to help them pay taxes owed.
Benefits of Worker Cooperatives
- Lower set-up costs than other forms of employee ownership.
- Persons who sell at least 30% of the shares in a business to a worker cooperative are exempt from capital gains taxes if the gain is reinvested in U.S. securities.
- Worker cooperatives allow members to build equity and participate in the governance of their workplace.
Employee Stock Ownership Plans, or ESOPs, were designed as a way to put ownership into the hands of American workers. Begun in 1974 with the passage of federal laws, ESOPs comprise an estimated 11,000 companies in the U.S., employing an estimated 11.5 million workers. The laws enacted to encourage employee ownership allow certain incentives for lenders, selling owners, and ESOP companies. The tax advantages of ESOPs often make them a lower-cost source of corporate financing than conventional sources.
What is an ESOP?
- An ESOP is an ERISA-qualified employee benefit plan that invests primarily in stock of the sponsoring company.
- It is a qualified retirement plan, like a profit sharing plan, which is able to borrow money. Allocations to individual employees’ accounts are typically based on salary.
- ESOPs are often used in closely-held companies to buy some or all of the shares of existing owners.
- As a qualified plan, it is subject to the retirement plan qualification rules in the Internal Revenue Code and under the Employee Retirement Income Security Act (“ERISA”).
How does an ESOP work?
- Employees have indirect ownership as “beneficial owners” of company stock through a trust which invests primarily in “employer securities” for the benefit of eligible employees.
- The company contributes to the plan — not the employees.
- Contributions are tax deductible.
- Employee voting rights can be, but don’t have to be, limited to major company decisions.
- When employees leave, they are paid out their account balances, based on the value of the company stock which is determined annually.
Benefits of ESOPs
- An ESOP creates an opportunity for an owner to diversify his or her investment holdings away from the business and establishes a market for stock which can be useful over time.
- It can also be a tax-advantaged corporate financing tool.
- For an S-corporation there are additional benefits; in the case of a 100% ESOP-owned S-corporation there is no Federal income tax.
- An ESOP can be used to motivate employees to think and act as owners in the way they do their jobs every day.
- Employees benefit from an added source of retirement savings.
- Persons who sell at least 30% of the shares in a business to an ESOP are exempt from capital gains taxes if the gain is reinvested in U.S. securities.
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