Employee ownership is a model that is gaining popularity among small businesses and SMEs in the UK. It offers a unique way for business owners to share the ownership of their company with their employees, ultimately giving them a stake in the success of the business. One way to achieve this is through an employee ownership trust (EOT). In this article, we will explore what an EOT is, and the pros and cons of implementing this model in your business.
An employee ownership trust is a type of trust that is set up to hold shares in a company on behalf of its employees. This means that the trust becomes the legal owner of the company, and the employees become the beneficial owners. The trust is managed by trustees, who must act in the best interests of the employees and the company.
One of the main benefits of an EOT is that it provides a smooth and seamless transition of ownership. This can be particularly beneficial for small businesses and SMEs that are family-owned, as it allows the current owners to pass on their shares to their employees without the need to sell the company to an external party. This can also help to maintain the company’s culture and values, as it remains in the hands of those who have been instrumental in its success.
Moreover, an EOT can also be a tax-efficient way to transfer ownership of a company. Under the current legislation, if a controlling interest in a company is sold to an EOT, the transaction is exempt from capital gains tax. This can result in significant tax savings for business owners, making it an attractive option for those looking to retire or step back from the day-to-day running of the company.
Another advantage of an EOT is that it can help to improve employee engagement and motivation. By giving employees a stake in the company, they are more likely to feel invested in its success and be motivated to work towards its growth. This can lead to increased productivity and loyalty among employees, which can have a positive impact on the company’s overall performance.
Furthermore, an EOT can also provide a sense of security for employees, as their jobs are less likely to be at risk in the event of a change in ownership. This can help to create a more stable and harmonious working environment, as employees feel valued and supported by the company.
However, as with any business model, there are also some potential downsides to consider. One of the main concerns with an EOT is that it can be a complicated and costly process to set up. Business owners will need to seek professional advice and assistance in creating the trust, which can involve legal and accounting fees. This can be a barrier for smaller businesses with limited resources.
Moreover, the EOT model may not be suitable for all businesses. It can be more challenging to implement in businesses with a large number of employees, as the trust will need to hold a significant number of shares to ensure that each employee has a meaningful stake. This can also make it difficult for businesses that are looking to raise additional capital in the future, as the trust will have a controlling interest in the company.
Another potential downside is that the employees may not have the necessary skills or expertise to make strategic decisions for the company. This could lead to a lack of direction and potentially impact the company’s growth and profitability.
In conclusion, employee ownership trusts can be an excellent option for small businesses and SMEs looking to share ownership with their employees. It offers a smooth transition of ownership, tax benefits, and can improve employee engagement and motivation. However, it is essential to weigh up the potential downsides, such as the complexity and cost of setting up the trust, and the impact on decision-making within the company. Seeking professional advice is crucial in determining whether an EOT is the right fit for your business.
