DEFINITION of 'Employee Share Ownership Trust (ESOT)'

An ESOT (employee share ownership trust) is a 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. Employee share ownership is supposed to 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.

BREAKING DOWN 'Employee Share Ownership Trust (ESOT)'

Reasons for a company to provide an ESOT include the following:

1. The ability of the company to test out how an employee share ownership plan would work
2. The creation of a mini market for the transference of a company's stock, which allows the company to obtain funds efficiently and educate its employees in share ownership
3. The provision of a tax incentive to shareholders should they decide to sell their shares in the company back to the company's ESOT

How an Employee Share Ownership Trust Functions

An employee share ownership trust is comparable to (but differs from) an employee stock ownership plan, which often serves as a form of retirement benefit to employees. Under an ESOT, there typically is a combination of an approved profit sharing scheme along with the trust that will acquire the shares. By letting employees obtain the shares through the profiting sharing scheme and trust, they could see certain tax benefits from using such an arrangement. The company could 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 they wish to divest.

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