Since their inception in 2014, Employee Ownership Trusts (EOTs) have seen a surge in popularity, with prominent companies like John Lewis adopting them and displaying their many benefits. While EOTs fall under the umbrella of employee benefit trusts, they stand out due to their unique characteristics, especially in terms of tax incentives.
In an EOT, the business’s shares are put into a trust which is looked after by one or more trustees for the benefit of the employees.
However, like any pivotal business move, it is essential to compare the advantages with the potential pitfalls before making a decision.
Here, Ramsdens Solicitors outlines the pros and cons of adopting an EOT, to help you to determine whether the business structure might be suitable for your organization.
What are the advantages of an EOT?
Your first question is likely to be whether an EOT provides enough benefits to warrant the process of changing your business structure, and the risks that might be associated with doing so. The main reasons to take the leap include:
● Future-proofing and sustained stability: the EOT structure often aligns with businesses that value long-term vision and resilience. It paves the way for a succession strategy that champions independence, giving employees a consistent and secure environment.
● Tax incentives: EOTs come with notable tax benefits. Particularly, those selling a dominant share in a company to an EOT can enjoy a Capital Gains Tax relief. Furthermore, EOT-owned businesses can distribute tax-exempt bonuses – up to £3,600 annually – to their employees.
● Boosting employee morale and loyalty: as stakeholders, employees are more likely to be more dedicated, enthusiastic and involved. This morale can improve their output and serve as a magnet for talent, while also fostering loyalty.
● Robust business outcomes: research indicates that businesses with employee ownership structures tend to be robust, with superior performance and a reduced susceptibility to downturns or acquisitions.
What are the challenges of an EOT?
Despite the benefits listed above, EOTs might not resonate with every business’s situation. It’s vital to also reflect on the potential hurdles you may face. For example:
● Intricacy and expenditure: setting up an EOT can be complex and financially demanding. It requires extensive groundwork and planning, legal and financial advice, and an understanding of HMRC obligations.
● Equity assessment: arriving at a mutually acceptable share valuation can be delicate. It may demand appraisal from experts and potentially intricate discussions to reach a fair agreement for all parties.
● Governance and direction: while EOTs can cultivate a collective sense of accountability, they might also result in disagreements in decision-making and strategy, especially if you fail to appoint strong leadership in the form of reliable trustees.
● Economic limitations: given the trust’s predominant share ownership, access to certain funds might be constrained, potentially limiting the enterprise’s expansion aspirations and its allure for investors. Whether this is an issue for you will depend on your organization’s goals and the specifics of the EOT arrangement you opt for.
Is the EOT structure ideal for your business?
The choice to transition to an EOT should not be made lightly, and you should make sure you fully grasp its potential implications for your business. It’s essential to seek expert legal advice to ensure your decision is well-informed, and to support you through the transition process.
Whether the decision of transitioning to an EOT is a good idea for efficiency and stability, or will pose challenges due to its intricacies and limitations depends largely on your business’s unique circumstances. However, it’s undeniable that EOTs present an interesting and forward-thinking departure from conventional business strategies. As such, they warrant consideration from business owners seeking innovative ways to bolster employee enthusiasm and ensure continued success.