What Is an Employee Share Ownership Trust (ESOT)?

An employee share ownership trust (ESOT) is a stock program that facilitates the acquisition and distribution of a company's shares to its employees. ESOTs are trust accounts through which a company can sell its shares to employees.

Key Takeaways

  • An employee share ownership trust (ESOT) is a stock program that allows for the acquisition of a company's shares by its employees.
  • An ESOT works through a profit-sharing scheme and a trust that acquires the shares.
  • Employees and the company can benefit through tax incentives by using an ESOT.
  • ESOTs are flexible share programs that promote company growth without relying on external financing.
  • ESOTs also increase employee benefits and help align employee incentives and work ethic to that of management.

Understanding an Employee Share Ownership Trust (ESOT)

An employee share ownership trust (ESOT) is comparable to but differs from an employee stock ownership plan, which often serves as a form of a retirement benefit to employees. Under an ESOT, there is typically a combination of an approved profit-sharing scheme along with a trust that will acquire the shares.

By permitting employees to obtain shares through a profiting sharing scheme and trust, employees can see certain tax benefits from using such an arrangement. The company can also see some tax relief from the cost of setting up and maintaining such an arrangement, as well as payments that go towards the trustees.

The trustees might borrow funds from outside third parties to have the resources to secure the shares for the trust. The company, in turn, pays the trustees to cover such expenditures. Trustees do not have to seek outside funds for these purchases and can operate entirely with the resources the company makes available, though this can limit the ability to secure more shares. It is possible for those costs to the company to be completely deductible if they are structured carefully.

The money the trustees receive is used for the so-called qualifying purpose of purchasing shares in the company for the sake of the employees. Depending on the scope of the trust, it may seek to secure a significant stake in the company, and then make those shares available to the employees. Likewise, the trust’s marketplace can serve as a vehicle for major shareholders to sell part of their stake that they wish to divest.

Advantages of an Employee Share Ownership Trust (ESOT)

ESOT's are extremely flexible, in that they can be used by both private and public companies, and with or without financing. It also avoids incurring funding problems that are apparent in other qualified plans.

An ESOT is a way to promote the company's growth without having to rely on external financing. Furthermore, a company's growth is limited by the ever-growing needs and requirements for employee benefits plans. An ESOT combines reducing the need for external financing with an employee benefits plan and results in increased cash flow as opposed to decreased cash flow.

ESOTs boost employee morale and improve employee incentives to work hard and make decisions that are in the company's best interests. Such an arrangement thus helps to align the interests of company employees with those of other shareholders.