An employee-owned company is a business that is owned in whole or in part by the people who work in it. In the United States there are three main ways to do it: an employee stock ownership plan (ESOP), an employee ownership trust (EOT), and a worker cooperative. They are not the same thing. An ESOP is a retirement plan regulated by federal law. An EOT is a trust that holds shares and has no federal statute behind it. A worker co-op is a company owned directly by its worker-members, who vote as members.
The right form depends on what the owner and the workers want: a tax-favoured exit for a founder, a flexible trust-based succession, or democratic control by the people doing the work. This guide compares the three in plain terms, and cites only primary pages from the IRS, the Department of Labor, the National Center for Employee Ownership (NCEO) and, for the UK trust, the UK government.
The short answer
| Question | ESOP | Employee ownership trust (EOT) | Worker cooperative |
|---|---|---|---|
| What is it? | A retirement plan that invests mainly in company stock | A trust that owns some or all of the shares | A company owned and democratically governed by its workers |
| Created by | Federal law (Congress) | No legal definition in US federal or state law, per NCEO | State cooperative or other incorporation law |
| Who holds the shares? | The plan, with accounts for employees | The trust, not the employees | The worker-members |
| Who controls it? | Set by the plan and company documents | Trustees under the trust documents | Members, usually one member one vote |
| Tax features | Specific tax incentives in the Internal Revenue Code | NCEO's page gives no specific EOT tax treatment | Co-op rules for patronage; see patronage refunds |
| Regulator | IRS and Department of Labor | No specific regulator named by NCEO | State filing office |
ESOPs: the federal route
The IRS describes an employee stock ownership plan as "an IRC section 401(a) qualified defined contribution plan" and says it must be designed to invest primarily in qualifying employer securities as defined in IRC section 4975(e)(8). The Department of Labor describes an ESOP as a type of defined contribution plan that is invested primarily in employer stock. It is regulated by the IRS and the Department of Labor under the Employee Retirement Income Security Act of 1974 (ERISA). NCEO describes an ESOP as a type of retirement plan, similar to a 401(k) plan, that invests primarily in company stock.
The IRS's guidance for examiners focuses on leveraged ESOPs, where the plan borrows to buy the employer's stock.
What the IRS says about the tax rules
Some of the tax features that draw owners to ESOPs are described in the IRS's own examination manual for ESOPs (a 2006 reprint, so check the current Code and a tax adviser before relying on it):
- If an owner of qualified securities sells to an ESOP and buys qualified replacement property within the replacement period, long-term capital gain is recognised only to the extent the amount realised exceeds the cost of the replacement property. This is the rule in IRC 1042.
- After the sale, the ESOP must own at least 30% of each class of outstanding stock of the company, or at least 30% of the total value of all outstanding stock.
- The seller must have held the qualified securities for at least three years at the time of sale, and the replacement period begins three months before and ends twelve months after the sale.
- Qualified securities are employer securities issued by a domestic corporation that has no stock readily tradeable on an established securities market.
The IRS's ESOP page also notes that an ESOP-owned S corporation cannot deduct retirement plan contributions for ESOP participants. Section 1042 as described above is a rule for owners of companies that fit those conditions, so an owner should get tax advice before planning around it.
What the Department of Labor says
The Department of Labor's FAQ on retirement plans and ERISA states that ESOPs do not have to pay out any benefits until one year after the plan year in which the participant retires.
How common are ESOPs?
NCEO reports, from 2023 plan-year filings, 6,609 ESOP plans covering 6,411 unique companies (5,993 private and 418 public), with 15,105,304 total participants, of whom 10,999,997 were active. A company may sponsor more than one plan.
Costs and complexity
NCEO notes that ESOPs are created by Congress, which results both in significant tax incentives and in heavy regulation, and that ESOPs must follow rules about which employees participate and on what terms.
Employee ownership trusts: flexible, but not a federal statute
An employee ownership trust is, in NCEO's words, generally a purpose trust that owns some or all of the shares of a company. NCEO says there is no legal definition of what separates an EOT from similar trusts, and its page identifies no federal or state statute that defines one. To become an EOT company, the current owner creates a trust that will own some or all of the business. The company then contributes cash to the trust, which uses it to buy shares from the owner, often with seller financing.
NCEO says the trust's governing documents generally require it to operate in the interest of employees, that employees do not pay to become beneficiaries, and that most trusts have the company set aside part of annual profits for a profit-sharing pool for employees. It also says EOTs are more flexible and less expensive than other forms of employee ownership, especially ESOPs.
Because there is no legal definition, an EOT is shaped by its own documents. Tax treatment is a question for a lawyer and tax adviser. NCEO does not certify EOTs in its registry, which covers ESOPs and worker cooperatives.
The UK has a statute; the US does not
The term comes from the UK, where employee ownership trusts are written into tax law (sections 236H to 236U of the Taxation of Chargeable Gains Act 1992, per gov.uk). The UK government's guidance says the relief applies to disposals of shares to trustees on or after 6 April 2014 that meet the relevant requirements, and that for disposals on or after 26 November 2025 the Capital Gains Tax relief is reduced from 100% to 50%. A US reader should not assume any of that carries across: it is UK tax law and it does not apply to a US company.
Worker cooperatives: ownership by members
NCEO defines worker cooperatives as enterprises solely owned and democratically governed by their workers. Instead of a plan or a trust holding shares for employees, the workers are the members and own the company directly. They govern the company democratically, and surplus is shared through patronage. For the full picture, read worker cooperatives.
NCEO reports at least 751 worker cooperatives in the United States, citing the Democracy at Work Institute's State of the Sector report (2023 edition), which it describes as up about 20% over the prior two years.
On its page about what employee ownership is, NCEO says worker cooperatives and EOTs together cover about 20,000 employees, compared with more than 14 million in ESOPs.
Which one fits?
| If the main goal is... | Look first at | Why |
|---|---|---|
| A founder selling to staff with the federal tax rules | ESOP | The Code has specific provisions for sales to an ESOP, including section 1042 for qualifying stock |
| A flexible, lower-cost succession without a federal plan | EOT | NCEO describes EOTs as more flexible and less expensive than ESOPs |
| Workers who vote and own directly | Worker cooperative | Members own the company and govern it democratically |
| A company that must keep S-corp status | Ask a tax adviser | The IRS notes limits for ESOP-owned S corporations |
This table is a way to frame the conversation, not advice. Each route has legal and tax traps.
Common questions about control
Employee-owned does not always mean employee-controlled. In an ESOP the plan holds the shares, in an EOT the trust holds them, and in a worker co-op the members own them and govern democratically. If democratic control matters to you, ask about it before you pick the form.
How a conversion usually goes
- Decide what you want: price, timing, continuity, culture.
- Get an independent valuation.
- Choose the form, with a lawyer and tax adviser who have done that type of deal.
- Arrange financing: seller notes, bank loans or co-op lenders. See cooperative lenders.
- Set up the governance and training so that employees understand what they own.
For the co-op route, see how to start a worker cooperative, which includes conversion of an existing business. For a financial co-op, see how to start a credit union. A deeper comparison with Mondragon and Publix is in worker cooperative vs employee-owned.
Frequently asked questions
What is an employee-owned company?
A business that is owned wholly or partly by its employees, through a plan (ESOP), a trust (EOT) or direct membership (worker cooperative).
Is an ESOP the same as a worker cooperative?
No. An ESOP is a retirement plan that holds company stock for employees, regulated by the IRS and the Department of Labor. A worker cooperative is a company owned and democratically governed by its workers as members.
What is an employee ownership trust?
NCEO describes it as generally a purpose trust that owns some or all of a company's shares. It has no legal definition in US federal or state law according to NCEO, and the UK has a statutory version.
Does the US have a federal law for EOTs?
NCEO's page says there is no legal definition of what separates an EOT from similar trusts and names no federal or state statute. ESOPs, by contrast, are created by federal law.
Do employees pay to become beneficiaries of an EOT?
NCEO says employees do not pay to become beneficiaries of an EOT.
How many employee-owned companies are there?
On NCEO's 2023 data: 6,411 companies with an ESOP, and at least 751 worker cooperatives per the Democracy at Work Institute report it cites.
Related guides
References & further reading
This guide is researched against primary sources. Where we cite figures, they reflect the most recent data published by these organisations at the time of writing.
- 1.Employee stock ownership plans (ESOPs) — Internal Revenue Service
- 2.What is employee ownership? — National Center for Employee Ownership
- 3.An introduction to employee ownership trusts — National Center for Employee Ownership
- 4.Employee ownership by the numbers — National Center for Employee Ownership
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