An ESOP is a wealth-building tool designed to place ownership in the hands of working Americans. This is accomplished through the establishment of a trust which owns company stock on behalf of eligible employees. Over time, stock is allocated in the name of employees on the basis of relative pay or another formula. Within three to six years with the company, an employee gains full rights over the shares in their account and is entitled to receive fair market value for those shares after leaving the company.

For regulation and tax purposes, ESOPs are treated as retirement plans. This provides some tax advantages while adding some oversight and management costs to the company. It’s therefore generally advised that a company considering an ESOP be of a certain size so that the tax advantages ultimately outweigh the costs of setting up and managing the plan. That threshold is somewhere around 20 employees and a few million dollars in total enterprise value but depends on a variety of factors.

ESOPs are the most common form of broad-based employee ownership in the US. There are around 6,500 ESOP plans in the US covering roughly 14 million participants, including around 2 million participants of privately held companies. ESOPs have had such relative success in the US in large part due to the tax advantages in place for ESOPs and their legal recognition in the Employee Retirement Income Security Act of 1974 (ERISA).

Studies have shown that ESOPs provide employees with a number of economic advantages over employees at traditionally-owned companies. Of particular note is that employee owners at S Corp ESOPs have more than twice the average retirement savings of the national average. Additionally, ESOP participants enjoy greater job security, higher pay, increased benefits, and better overall job satisfaction on average. Importantly, these benefits come at no cost to the employee, as it’s the company which contributes dollars to the plan – not the employees.

A worker cooperative is a type of democratically-run business that is owned directly by its employees. Typically, worker cooperatives are driven by a mission that centers the quality of life for employees and the co-op’s benefit to the surrounding community.

In a worker co-op, all full time employees are eligible to become owners after completing an eligibility period and applying for membership. Once approved, employees buy into the cooperative by purchasing a single share to finalize their membership. Membership entitles them to a share of profits and an equal say in governance control.

Voting in a co-op is not typically required for operational decisions. Instead, the co-op model distinguishes operations from governance. Members participate in governance when voting for or acting as board members or helping decide strategic decisions, but remain focused on their responsibilities as defined in their job descriptions throughout most of the work week.

In many cases, the board will select a manager to handle operational decisions as they arise. In other cases, a co-op will prefer to operate as peers, empowering each member to take greater responsibility over their work and the co-op’s overall health. Many co-ops train workers to be more engaged as owners through participatory management practices and financial transparency.

In addition to having a formal say in the workplace, members of worker co-ops have been shown to experience better working conditions and pay compared to employees in similar lines of work. Because worker owners make major decisions together, they are less vulnerable to layoffs and pay cuts during economic shocks and more likely to remain financially steady during periods of crisis.

There are pockets of the world where worker co-ops are more commonplace, but the model remains relatively rare in the US. All told, there are more than 600 worker cooperatives in the US, employing around 6,000 workers.

With around 20 businesses operating under the model, Vermont has the highest per capita concentration of worker cooperatives of any state. This success can be attributed to longstanding advocacy efforts to raise awareness and build resources for worker co-ops in Vermont. Nonetheless, structural issues continue to limit development of the cooperative sector.

Cooperatives are typically set up as corporations, and in Vermont, there is a Worker Cooperative Corporation Statute.

Benefits particular to worker cooperatives include: lower set-up costs than other employee ownership models, possibility for selling owners to defer capital gains taxes on transaction, and ability for members to build wealth and participate in the governance of their workplace.

An Employee Ownership Trust is a type of perpetual trust that owns a company and functions as a profit sharing plan while also allowing for increased employee involvement in the company’s operations and strategic direction if desired. Under the EOT structure, the company may set aside a portion of its profits it would like to reinvest in the company and then will distribute the remainder of profits to the employees based on a formula that may account for wages, seniority, or other factors.

A key advantage of the Employee Ownership Trust model is the ability to set up the trust so that the company ownership remains in the hands of the trust indefinitely. Those familiar with Employee Stock Ownership Plans in the United States will likely be familiar with their relative vulnerability to outside buyers who wish to purchase the company and buy out the employee owners. If a business owner is concerned about preserving employee ownership for the long-term, an EOT can be an attractive solution.

Another benefit of the EOT model is the simplicity of its profit sharing structure. Because employees are “naked in, naked out” in an EOT, there is no need to set aside money to buy out employees who are leaving the company, as is a serious consideration for ESOP companies. Similarly, because employees do not purchase a share in order to benefit from ownership, as with a worker co-op, an EOT does not need to set aside money to repurchase those shares for departing employees. On the flip side of that, EOTs may not offer employees the opportunity to build wealth at the same scale as can be possible through an ESOP plan.

Unlike in the United Kingdom, EOTs do not benefit from special tax treatments in the United States. Some companies, however, may still choose to opt with EOT over an ESOP due to the lower set up and maintenance costs of an EOT. Ultimately, an EOT is an emerging business model that offers some benefits and some drawbacks compared with a worker cooperative or an ESOP.