Employee Ownership FAQs

An EOT is a business structure through which the employees of a business become the beneficiaries of Trust which will own some or all of the shares in a Company. The Trust is managed by the trustees on behalf of these employees, for the benefit of the employees.

The EOT structure enables a business owner to sell their business to the EOT without having to put it on the open market. The owner/seller can remain within the business, and benefits from equal profit sharing along with all other employees/trustees.

For the employees, the main benefit of becoming an EOT is that they qualify to benefit from a share of the company’s profits, in addition to receiving their normal salary. EOTs have generally proven to be more successful than businesses with a more traditional business structure, because employees are more committed, loyal and productive, and there is a more collaborative and positive culture of inclusivity, even though a similar management structure usually remains in place.

Becoming an EOT provides some financial stability and resilience, and the sales process of selling the shares to the EOT is often much easier as there are no issues with selling to an unknown third party. As the owner is selling to a friendly buyer, this helps with any emotional ties, particularly as the owner can remain within the business. Finally, the EOT benefits from this process as there is a smoother transition to a new business structure than if the sale was to a third party, with all the risks that entails.

The employee-owned businesses in the UK cover a wide variety of sizes, in terms of market sectors and the number of employees. So whether your business becomes employee owned is really down to your specific circumstances as a business owner. Does it appeal to you? Is it what you want your business to become? Does it make financial sense? If you want the legacy of your business to continue and be protected, and to promote loyalty, commitment and inclusivity, then there is a good chance that becoming an EOT is a good decision. But if you want more advice you should speak to one of our experts.

There are some restrictions around the number of sellers, compared with the number of employees who are not sellers, which may mean that an EOT is not suitable for very small/micro businesses. The Sellers, or parties connected to the Sellers, cannot account for 40% or more of the workforce. For example, if you had a business with 8 staff, but 4 of these were Sellers, then the business would not qualify to become an EOT as 50% of the workforce were sellers, however a business with 6 staff members, only one of whom was a seller would be eligible to become an EOT.

No, a business doesn’t have to be 100% employee owned to become an EOT. Technically a business qualifies for the tax benefits to become an EOT when at least 50% or more of the ownership is on behalf of the employees. You can however sell whatever proportion of your shares to an EOT as you wish but there would be no tax advantage in doing so if you sell less than 50% of the shares.

In reality, most businesses that become an EOT will sell 100% of the shares to the EOT but you are not required to do so.

Usually, when an employee leaves a company, they will cease to be a beneficiary of the EOT. As the employees do not individually own any shares, there is nothing for the employee to sell and there are no complications around having to recover shares. This is because the trust holds the shares on behalf of current employees.

The board of the Company and the Trustees of the EOT will determine the amount of any profit share, and the amount of this naturally depends on whether the business records a profit. Each EOT can have its own rules about how the profit is shared however this can only be linked to certain objective provisions based on some or all of the following provisions:

1. Fixed share so everyone receives the same
2. Length of Service
3. Remuneration
4. Hours worked

It is possible to use a combination of the above but Trustees cannot pick and choose which employees receive what as an individual bonus. The scheme rules have to determine the basis on which the distribution is to be applied.

The business is still ultimately run by the directors of the business. The directors of the business will still make all key operational decisions such as around recruitment, business direction and expenditure.

However a key incentive for making a business an EOT is giving employees greater influence in how it is run as it is ultimately being run for their benefit as employees. There are various ways this can be done, for instance it may be advisable to form an employee council, where employees have representatives on the council to give feedback or make recommendations to the board of directors. The board of directors may also need to have certain decisions, such as the profit distribution, approved by the Trustees.

However, the everyday management of the company remains the same, and is the responsibility of the board, as previously. The trustees of the EOT are majority shareholders though, meaning they will have voting control on some matters and need to be consulted on decisions influencing the financial transactions of the EOT. The board should consult regularly with the employee council, as the representative body of the employees and indirect owners of the company.

The two main tax advantages of becoming an EOT benefit the owner and the employees respectively. If an owner makes a profit from selling their business to an EOT, they are exempt from paying capital gains tax. Secondly, if the employee receives a profit share from the EOT, this is tax-free up to the amount of £3600, although they would still need to pay national insurance on that income.

Any amount distributed to employees as a profit distribution has the effect of reducing the profit in the business meaning that te Company will also save on corporation tax.

When selling a business to an EOT, there will be a change of control in connection with the shares and matters requiring shareholder approval however day to day operational decisions are within the control of the board of the company and in most situations, the Sellers remain directors of the company after the transaction has completed.

While the trustees of the EOT are now majority shareholders, the day-to-day operations of the business are still run by the board, and hence the management structure usually stays the same. The idea is that employees and management are now completely aligned in their interests, because they benefit equally and hence management structure largely remains the same, although it is a good opportunity to introduce new board members and make new managerial appointments.