October is Employee Ownership Month. Employee ownership can take many forms, from 100% employee ownership through an ESOP or a cooperative to synthetic equity plans where no actual equity is sold, but employees participate in the profits of the company. Employee ownership allows employees to participate in the success of the company and may allow participation in the management of the company.
Existing companies may consider employee ownership as a way to address succession issues, encourage an “owner mentality” among employees, reward employees for their contribution to the success of the company, or help recruit talent. There is no one-size-fits-all employee ownership solution--the best alternative depends on the current ownership structure, capital needs, number of employees, long-term exit plans, and other company-specific factors.
Here are some common types of employee ownership:
- "ESOP" means an Employee Stock Ownership Plan. The IRS defines ESOP as an IRC section 401(a) qualified defined contribution plan that is a stock bonus plan or a stock bonus/money purchase plan. An ESOP must be designed to invest primarily in securities of the Company and must meet other tax requirements.
- Employee Cooperatives or "Co-Ops" are 100% owned by employees who participate in the profits of the company. Co-Ops operate democratically, with each employee holding one vote.
- Equity Incentive Plans allow companies to share ownership with its employees through awards of equity incentive compensation to its employees, directors, and consultants. The awards can be of equity or equity options which allow for the purchase of equity at a future date if the value has appreciated.
- Phantom Stock Plans allow employees to participate in the increase in value of the company without actually receiving equity. Phantom stockholders receive cash upon redemption of their shares but do not have any voting rights.
If you are considering employee ownership for your company, Colorado offers an Employee Ownership Tax Credit for Colorado-headquartered businesses and their employees to establish or expand certain employee ownership structures where at least 20% of the equity is owned by employees (excluding founders). The tax credit covers up to 50% of qualified businesses' conversion costs as a credit to their state income taxes.
Colorado companies can reach out to the Rocky Mountain Employee Ownership Center or the Colorado Employee Ownership Office for the Office of Economic Development & International Trade for additional resources.