All three are forms of broad-based employee ownership, but they differ in cost, complexity, and mechanics. An EOT holds the company in trust for employees, who do not buy their own shares; it tends to have lower setup costs and more flexibility than an ESOP, but it does not offer the selling owner the capital-gains tax deferral an ESOP or worker cooperative can. An ESOP is a regulated retirement-benefit plan with higher setup and compliance costs. A worker cooperative is directly member-owned and governed one-member-one-vote.
Employee Ownership Trusts (EOTs), ESOPs, and worker cooperatives are the three main forms of broad-based employee ownership. They share the goal of putting ownership in employees' hands, but they work differently.
Employee Ownership Trust (EOT)
- The company is held in a trust for the benefit of employees. Employees do not buy their own shares, so there is no out-of-pocket cost to them.
- Setup costs are relatively low and the structure is highly flexible — you can tailor governance, profit-sharing, and the pace of the transition (including partial conversions).
- No capital-gains tax deferral for the selling owner (unlike the Section 1042 election available with ESOPs and worker cooperatives). The business can generally deduct profit-sharing distributions, which are taxed to employees as ordinary compensation.
ESOP (Employee Stock Ownership Plan)
- A federally regulated retirement-benefit plan that holds company stock for employees.
- Higher setup and ongoing compliance costs, but it can offer the selling owner Section 1042 capital-gains deferral and, for S corporations, significant ongoing tax advantages.
Worker cooperative
- Directly member-owned; employees become member-owners and typically govern one-member-one-vote.
- Members may buy in; the cooperative can deduct patronage distributions, and sellers may use a Section 1042 deferral.
Which fits best depends on company size, the owner's tax situation and goals, and how much governance change the team wants. The Section 1042 election and S-corporation references describe US tax law; equivalent reliefs differ in the UK. This is general education, not legal or tax advice; confirm the specifics with a CPA or an attorney experienced in employee-ownership transitions.