ESOPs vs Employee Ownership Trusts (EOTs): What’s the Difference?

Thinking about retirement or exit planning? Selling your business is about more than just finding a buyer. It’s about making sure what you’ve built—and the people who helped build it—continue to thrive long after you step away.

That’s why many small to mid-sized business owners are exploring employee ownership, like Employee Stock Ownership Plans (ESOPs) and Employee Ownership Trusts (EOTs), as a viable succession plan. Both models offer a way to reward your team and protect your company’s future, but they take very different paths to get there.

In this guide, we’ll break down the basics of ESOPs and EOTs—including structure, benefits, costs, and implementation—to help you understand which model makes the most sense for your business, your people, and your goals.

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What’s an ESOP (Employee Stock Ownership Plan)?

An Employee Stock Ownership Plan (ESOP) is a federally regulated retirement plan that owns shares of the company on behalf of its employees. ESOPs are a well-established model with decades of proven success, offering significant tax advantages and strong regulatory protections for employee participants.

How an ESOP works:

1. Set up as a trust, the ESOP buys shares from the owner, typically using a loan repaid by company profits.
2. Shares in the trust are allocated to individual share accounts for employees.
3. When an employee leaves or retires, the company is required to repurchase their shares at fair market value.

Key characteristics of an ESOP:

• Valuation: Annual independent valuations required to regularly assess the company’s value.
• Tax Benefits: Sellers may defer capital gains taxes when specific requirements are met (under IRC §1042), and company contributions to the ESOP plan are generally tax-deductible.
• Costs: Sizeable initial setup fees depending upon company size and complexity (often $200K+), as well as ongoing administrative costs.
• Regulatory Oversight: Regulated by the Department of Labor under ERISA, with comprehensive fiduciary protections to safeguard employee interests.
• Governance: Structured requirements for voting rights and corporate governance that provide clear decision-making frameworks.‍
• Timeline for implementation: Typically 6–9 months due to thorough regulatory requirements and structure.

Is an ESOP right for your business?

ESOPs can work well for larger, established companies with strong cash flow and sophisticated cash management practices, where the tax advantages outweigh the complexity and costs, and where workforces are likely to be motivated by a long-term retirement product.

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What is an EOT (Employee Ownership Trust)?

An Employee Ownership Trust (EOT) is a mission-driven ownership model in which a trust holds a stake in the company on behalf of employees. Unlike ESOP-owned companies, employees at an EOT don't directly own individual shares within a retirement plan. Instead, the trust owns the business, and employees benefit from indirect ownership through profit sharing and governance rights.

How an EOT works:

1. A trust purchases the company, which can be done through a combination of external debt and seller financing, or entirely through seller financing.
2. The trust owns the company for the benefit of employees, who receive profit sharing and opportunities for shared governance.
3. When employees leave or retire, they typically no longer have the rights or benefits defined for employees by the trust, so the trust can remain a long-term owner that continues to benefit the current generation of employees.

Key characteristics of an EOT:

• Valuation: Third-party valuation to ensure a fair transaction.‍
• Tax Benefits: EOTs don’t currently provide the same tax benefits as ESOPs, however, there are a variety of tax-optimization strategies that can be pursued as part of a sale to an EOT.‍
• Costs: Lower setup costs (often under $50K) with minimal ongoing administrative expenses.‍
• Regulatory Oversight: There is currently no regulatory regime—EOTs offer flexibility and customization with strong internal governance controls established in the trust.‍
• Governance: Customizable governance structures can be tailored to allow owners to retain control through options like partial sales, voting control separation, or governance roles.‍
• Timeline for implementation: Often completed in 4–6 months due to reduced complexity.

Is an EOT right for your business?

EOTs offer high flexibility and lower financial investment, making them a great option for mission-driven companies of various sizes, including smaller businesses that might not meet ESOP thresholds or be willing to take on ongoing administration complexity and costs, as well as larger companies looking to pursue a more customized approach to employee ownership.

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How ESOPs and EOTs Compare (and Why It Matters)

Are these ownership models still feeling a bit murky? Here’s how ESOPs and EOTs compare across the areas that matter most:

What to consider before choosing an ESOP:

• Well-suited for larger, financially mature companies with steady cash flow
• Significant tax advantages for owners and the company if requirements are met
• Heavily regulated with ongoing administrative, legal, and fiduciary obligations
• Requires annual third-party valuations and formal repurchase obligations
• More standardized and regulated structures leave less room for customization or phased transitions

What to consider before choosing an EOT:

• Good fit for founders seeking a gradual, phased exit
• Lower setup and ongoing administrative costs
• Highly customizable and flexible in terms of deal structure, governance, and post-sale roles
• Doesn’t offer the same tax benefits as ESOPs
• Allows for tailored employee incentive models, including profit sharing for the broad base of employees as well as market standard incentive structures for senior leaderhsip

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ESOP or EOT: Choosing your path forward

Choosing the right employee ownership model isn’t just about the numbers—it’s about your goals, your people, and the legacy you leave behind.

If you’re considering either an Employee Stock Ownership Plan or an Employee Ownership Trust, start by evaluating your:

• Company’s size and maturity
• Ability and resourcing available to manage ongoing administrative requirements
• Desired level of involvement after the transaction
• Risk tolerance
• Desired outcome for your employees and optimal employee incentive models (i.e. retirement product or profit sharing)
• Timeline needs

And if you’re still unsure—or are ready to explore how an EOT could work for your business—we’re here to help.

At Common Trust, we specialize in guiding founders through the EOT transition process, unlocking liquidity, empowering employees, and preserving what makes your company unique. Schedule a free advisory call with one of our EOT experts today.

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