How to Form an Employee-Owned Company

Employee ownership is a form of company ownership where a company’s employees own shares in their company or the right to the value of the shares in the company. The most common form of employee ownership is the employee stock ownership plan, or ESOP. In an ESOP, employees own shares through a trust funded by the company. There are many advantages of being a part of an ESOP or other form of employee ownership, so it is important to understand how to form one for your own company.

The first step of forming an employee-owned company is to get other employees on board, and whether the parent firm is willing to sell as well. Once everyone agrees that employee ownership is the logical next step, a feasibility study should be conducted to determine whether your company can be employee owned or not. This study includes looking at factors such as determining if the company has adequate payroll for the employees, estimating the repurchase obligation and how the company will handle that, and more. The next step after that would be conducting a valuation. In this step, a valuation consultant will evaluate many factors, including profits, market conditions, comparable company values, and the like. If everything is running smoothly through the first few steps, a plan can now be drafted by an attorney to form your desired employee-owned company, and McNeely law has attorneys willing and prepared to assist your company through this process.

As previously stated, there are a variety of advantages towards transitioning to an employee-owned company such as an ESOP. Employee ownership generally provides flexibility and tax benefits, all while maintaining the integrity of the company. Also, many studies have shown that employee ownership increases company performance compared to similar companies who do not participate in employee ownership. In addition, employees at employee-owned companies are significantly less likely to be laid off and generally receive higher wages. These factors generally contribute to more secure financial futures, which in turn keeps jobs within the local community. In our case, this would mean more jobs and a larger community wealth here in Indiana.

There are many resources that can assist you in your process towards transitioning to an employee-owned company. Organizations such as the Indiana Center for Employee Ownership are willing to assist anyone in the process. Additionally, contact McNeely Law for any of your employee-ownership needs as we have a team of experienced attorneys ready to help you.

This McNeelyLaw LLP publication should not be construed as legal advice or legal opinion of any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer on any specific legal questions you may have concerning your situation.