What is an Employee Owned Company?
Employee ownership occurs when a corporation
is owned in whole or in part by its employees. Employees are usually given a share
of the corporation after a certain length of employment or they can buy shares at any time. A corporation owned entirely by its employees (such as a worker cooperative
) will not, therefore, have its shares sold on public stock market
s, often opting instead for mixed ownership arrangements involving a trust. Employee-owned corporations often adopt profit sharing
where the profits of the corporation are shared with the employees. They also often have boards of directors
elected directly by the employees. Some corporations make formal arrangements for employee participation, called Employee Stock Ownership Plans (ESOPs).

Employee ownership appears to increase production and profitability, and improve employees' dedication and sense of ownership. However, critics caution that democratic leadership can lead to slow decision-making, and employee stock ownership can increase the employees financial risk if the company does poorly.
Notable employee-owned corporations include the John Lewis Partnership
retailers in the UK
, and the U.S. news/entertainment firm Tribune Company
. The most celebrated (and studied) case of a multi-national corporation based wholly on worker-ownership principles is the Mondragon Cooperative Corporation
. Unlike in the United States, however, Spanish law requires that members of the Mondragon Corporation are registered as self-employed. This differentiates co-operative ownership (in which self-employed owner-members each have one voting share, or shares are controlled by a co-operative legal entity) from employee-ownership (where ownership is typically held as a block of shares on behalf of employees using an Employee Benefit Trust, or company rules embed mechanisms for distributing shares to employees and ensuring they remain majority shareholders).

Different forms of employee-ownership, and the principles that underlie them, are strongly associated with the emergence of an international social enterprise
movement. Key agents of employee-ownership, such as Co-operative UK and the Employee Ownership Association (EOA), play an active role in promoting employee-ownership as a de facto standard for the development of social enterprises.

Most features of employee-owned corporations described in this article are not specific to any one nation. The information on taxation and stock trading refers to United States
law and may differ elsewhere.
Benefits to employees

There are several rationales for employee-owned corporations in the U.S. First, there are substantial tax benefits for employee ownership companies. Employee stock ownership plans (ESOPs) are set up by companies as a kind of employee benefit trust
. An ESOP is a type of employee benefit plan designed to invest primarily in employer stock
. To establish an ESOP, a firm sets up a trust and makes tax-deductible contributions to it. All full-time employees with a year or more of service are normally included. The ESOP can be funded through tax-deductible corporate contributions to the ESOP. Discretionary annual cash contributions are deductible for up to 55% of the pay of plan participants and are used to buy shares from selling owners. Alternatively, the ESOP can borrow money to buy shares, with the company making tax-deductible contributions to the plan to enable it to repay the loan. Contributions to repay principal are deductible for up to 25% of the payroll of plan participants; interest is always deductible. Dividend
s can be paid to the ESOP to increase this amount over 25%. Sellers to an ESOP in a closely held company can defer taxation on the proceeds by reinvesting in other securities
. In S corporation
s, to the extent the ESOP owns shares, that percentage of the company's profits are not taxed: 100% ESOPs pay no federal income tax. Employees do not pay taxes on the contributions until they receive a distribution from the plan when they leave the company; even then they can roll the amount over into an IRA
.

Stock acquired by the ESOP is allocated to accounts for individual employees based on relative pay or some more equal formula. Accounts vest
over time, usually following one of two formulas: in the first, vesting starts at two years and completes at six; in the second, participants become 100% vested after four years. When employees leave the company, they receive their vested ESOP shares, which the company or the ESOP buys back at an appraised fair market value. ESOP participants must be allowed to vote their allocated shares at least on major issues, such as closing or selling the company, but are not required to be able to vote on other issues, such as choosing the board.

Employees also can acquire stock through grants of stock options, the right to buy shares at a price set today for a defined number of years into the future. There are no special tax benefit associated with most forms of stock options, however. Employees can also become owners by purchasing shares in a stock purchase program, usually at a discount, by buying stock in their 401(k)
savings plans, or by companies making matches of company stock to employee deferrals into these plans. Stock in 401(k) plans can be bought with pretax income, while company contributions are tax-deductible.

Altogether, there are about 11,500 ESOPs covering 11 million employees, almost all in closely held companies. The other forms of ownership generally occur in public companies, and another estimated 15 million employees participate in one or more of these plans (see data from the National Center for Employee Ownership).