Is an EOT a limited company?

What is an Employee Ownership Trust?

An EOT company type stands for Employee Ownership Trust. Essentially, this is a form of business structure where employees have a significant and meaningful stake in a business. The key principle of an EOT is that it offers a sustainable ownership model for business continuity, and can work across a range of company sizes and sectors. By utilising an EOT, businesses can unlock numerous benefits including workforce engagement and productivity, alongside financial rewards for employees.
An EOT operates on the idea that the employees own a majority shareholding in the company. This shared ownership model encourages employee engagement, drives productivity, and can even facilitate smoother business succession. An EOT is often chosen by businesses that want to reap the benefits of a more collaborative and inclusive working environment, where the increased sense of ownership and responsibility among employees leads to improved results.

Trust Structure Basics

Now that we know what an EOT is, let’s delve into the basic structure of these types of trusts. The structure of an EOT is typically a tripartite one: it involves the company, the trustees and the employees. The trustees are usually appointed by the company, and they hold shares on behalf of the employees. The employees, while not directly holding the shares, have a say in significant business decisions by default this setup.
The trust’s deed perhaps is the guiding light for the operations of any EOT. This document prescribes the powers and responsibilities of the trustees, and sets out the procedures for their appointment and removal. It is therefore, important that the trust deed is drafted with great care so that it is consistent with the business objectives and employee interests.

The Company Itself Remains a Registered Limited Company

One key aspect to understand about the EOT company type is that fundamentally, the company still remains a registered limited company. Despite the change in ownership structure, the company’s name, legal status, and registration number remain unchanged. This is an important factor to consider as it means that EOT companies can enjoy the benefits and protections that a limited company structure provides.
These protections notably include limited liability, which essentially means that a company’s financial liability is limited to a fixed sum. In essence, becoming an EOT does not mean the end of a company as a limited entity, rather, it’s a shift of ownership from one or more individuals, to a collective – the employees.

Company Governance Impacts

Transitioning to an EOT model impacts a company’s governance landscape as well. However, it’s important to understand that these modifications occur primarily at an ownership level. On an operational level, the day-to-day running of the business can remain the same. The board of directors can still be in charge of making key management decisions, and the role of governing the company can notably remain with them.
However, it is on decisions of a strategic nature that employees often get to voice their opinions. Since they own a majority share, any changes such as selling the company or its significant parts, changing the nature of business, or undertaking activities involving substantial capital outlay would typically require their consent.

Legal and Tax Implications

When a company transitions to become an EOT, there are legal and tax implications of company structure that must be acknowledged. From a legal perspective, employees are not actually the legal owners of the company – the trustees are. This is because employees do not directly own the shares in the company, the trust does.
From a tax point of view, this structure can be very favourable to both the owners and employees. The main advantage is that the sale of shares to the EOT is generally exempt from capital gains tax. Then there’s the fact that bonuses paid by the company to employees can be tax-free, up to a certain limit. This collection of incentives can make an EOT an attractive option for many business owners.

Importance of Professional Advice

The move to an EOT structure is not a decision to take lightly. Taking the leap from a traditional business model to an employee-owned business can come with its complexities. Gaining professional advice can be invaluable in helping to navigate these challenges to ensure a smooth transition and maximise the opportunities of an EOT.
There are many factors to consider, from the appraisal of the business worth, to setting up the trust, down to the nitty-gritty legal and tax implications. Professional advisers can help to tailor a solution that best matches the business objectives, provide personal advice and ensure that potential pitfalls are avoided.

Conclusion

In conclusion, the EOT company type offers an extensive range of benefits for business owners and employees alike. Whilst the company remains a limited company, the transition to an EOT model provides an ownership structure that can improve productivity, ensure business continuity and deliver a host of financial benefits.
Nevertheless, the implications of company structure change should not be overlooked. To navigate the complexities and maximise the opportunities of an EOT, gaining professional advice is highly recommended.