In this article, we are going to discuss the benefits to employees of a company owned by an EOT, compared to a more traditional limited company or partnership.
What does being in an EOT mean for an employee?
Employees of a trading company (or group) owned by an EOT do not directly own shares in the company. Instead, they are the beneficiaries of a trust that owns a controlling share of the company. A group of trustees are appointed to represent the employees to ensure that the management team is running the business in the best interests of the employees as a whole.
A disposal to an EOT does not affect contracts of employment for the individual employees and may not change the management of the company – at least in the short to medium term. There can also be less risk of redundancies and change in company culture compared to a share sale to a third party.
Tax-Free bonuses
Eligible employees can be paid tax-free cash bonuses of up to £3,600 per tax year without paying any income tax. It is important to note that whilst employees will be exempt from income tax on their bonuses (up to £3,600), National Insurance Contributions still apply.
Increased control
An EOT is run by the Trustees (typically a corporate trustee company which is run by a board of directors known as the Trust Board). It is still the duty of the directors of the trading company to manage that company however it is the role of the Trustees to ensure that the company is being managed and led in the best interests of the employees as a whole. This differs from more traditionally owned privately limited companies or partnerships whereby the equity is typically owned by a small group of individuals.
Shareholder benefits
Profits of the trading company are available for distribution to the owners – in the case of an EOT, the profits are available for distribution to the employees. Firstly this will be by utilising the available tax-free bonus allowance, after which profit distributions will be taxable.
It is important to note that following a transition to employee ownership, profits will initially be required to pay the exiting shareholders for the value of the shares they sell. This is because a sale to an EOT is often (at least partly) funded through deferred consideration and as such, it can take time for profits to be available for distribution to the employees.
Our EOT advisers
We have advised many businesses to complete their transition to employee ownership. Hawsons have been working with businesses on EOTs since they were introduced in 2014, completing our first deal in 2016.
We are a member of the Employee Ownership Association who represent organisations that are employee-owned or transitioning to employee ownership across the UK.
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Pete Wilmer
Corporate Finance Partner
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Pete Wilmer
Senior Partner
Pete leads the Corporate Finance offering across the firm, having has spent much of his career within a large international accountancy firm and corporate banking before returning to Hawsons, where he started. Working with businesses of all sizes, Pete has an exceptional breadth of experience which he brings to the benefit of clients.
An early adopter and passionate believer in good employee ownership, Pete has helped numerous businesses transition to employee ownership and works extensively to promote the employee ownership model.