Employee ownership 

occurs when a business is owned in whole or in part by its employees. Employees

are often given a share of the business after a certain length of employment or they can buy shares at
any time. They also often have boards of directors elected directly by the employees. Some corporations
make formal arrangements for employee participation, called employee stock ownership
plans (ESOPs).

Employee ownership appears to increase production and profitability, and improve employees' dedication
and sense of ownership.[1][2] However, democratic leadership can lead to slow decision-making, and
employee stock ownership can increase the employees financial risk if the company does poorly.
[3]
 Notable employee-owned corporations include the John Lewis Partnership retailers in the UK, and
the United States news/entertainment firm Tribune Company. The most celebrated (and studied) case of
a multinational corporation based wholly on worker-ownership principles is the Mondragon Cooperative
Corporation.[4] Unlike in the United States, however, Spanish law requires that members of the
Mondragon Corporation are registered as self-employed. This differentiates co-operative ownership (in
which self-employed owner-members each have one voting share, or shares are controlled by a co-
operative legal entity) from employee ownership (where ownership is typically held as a block of shares
on behalf of employees using an Employee Benefit Trust, or company rules embed mechanisms for
distributing shares to employees and ensuring they remain majority shareholders).[5][6]

Different forms of employee ownership, and the principles that underlie them,[7] are strongly associated
with the emergence of an international social enterprise movement. Key agents of employee ownership,
such as Co-operatives UK and the Employee Ownership Association (EOA), play an active role in
promoting employee ownership as a de facto standard for the development of social enterprises.[8]

Most features of employee-owned corporations described in this article are not specific to any one nation.
The information on taxation and stock trading refers to United States law and may differ elsewhere.[9]

WHAT IS AN EMPLOYEE STOCK OWNERSHIP PLAN - ESOP ?

An employee stock ownership plan, or ESOP for short, is a stock bonus plan that
invests corporate profits back into the stock of sponsoring employer by rewarding employees with
company stock.  An ESOP is a qualified plan and therefore, provides special tax benefits to the
sponsoring employer, plan participants, and even the shareholder who sold the shares which were
made available to the ESOP.

ESOPs are defined contribution plans which consist of a stock bonus plan or a hybrid which has a
combination of a stock bonus plan and a money purchase pension plan. 
Employee stock ownership plans keep the employees focused on bettering the company and thus,
becomes a win-win proposition for all parties involved.  

WHAT ARE THE CONTRIBUTION LIMITS IN AN ESOP?

The ESOP is similar to a profit sharing plan or a money purchase pension plan in that it caps the
employee benefit out at the lesser of the following two; 25% of their annual salary or $45,000.

WHEN CAN I WITHDRAW THE FUNDS IN MY ESOP?

In most cases, employer ESOP contributions vest 100% after 5 years.  This would mean that the
employee would be able to sell 20% of the contribution every year for 5 years.

Alternatively, vesting can occur based on the number of years of employment with that company. 
Some companies will mandate that the employee be with the firm for at least 3 years before vesting
can begin.  Make sure you check with your HR resources to understand your entitlement.

If for some reason, you leave your employer before full vesting takes place, you will forfeit the
unvested portion of your ESOP account.

WHAT HAPPENS TO MY ESOP IN THE UNFORTUNATE CASE OF MY

DEATH?

In the case of an untimely death, the ESOP balance becomes 100% vested and withdrawal is
allowed by the designated beneficiary that you set on the account.

 
Benefits to employees
There are several rationales for employee-owned corporations in the U.S. First, there are substantial tax
benefits for employee ownership companies. Employee stock ownership plans (ESOPs) are set up by
companies as a kind of employee benefit trust. An ESOP is a type of employee benefit plan designed to
invest primarily in employer stock. To establish an ESOP, a firm sets up a trust and makes tax-deductible
contributions to it. All full-time employees with a year or more of service are normally included. The ESOP
can be funded through tax-deductible corporate contributions to the ESOP. Discretionary annual cash
contributions are deductible for up to 55% of the pay of plan participants and are used to buy shares from
selling owners. Alternatively, the ESOP can borrow money to buy shares, with the company making tax-
deductible contributions to the plan to enable it to repay the loan. Contributions to repay principal are
deductible for up to 25% of the payroll of plan participants; interest is always deductible. Dividends can be
paid to the ESOP to increase this amount over 25%. Sellers to an ESOP in a closely held company can
defer taxation on the proceeds by reinvesting in other securities. In S corporations, to the extent the
ESOP owns shares, that percentage of the company's profits are not taxed: 100% ESOPs pay no federal
income tax, but the profit distribution to the participants is taxed, just as in any S-corporation.[citation
needed]
 Employees do not pay taxes on the contributions until they receive a distribution from the plan when
they leave the company; even then they can roll the amount over into an IRA.

Stock acquired by the ESOP is allocated to accounts for individual employees based on relative pay or
some more equal formula. Accounts vest over time, usually following one of two formulas: in the first,
vesting starts at two years and completes at six; in the second, participants become 100% vested after
four years. When employees leave the company, they receive their vested ESOP shares, which the
company or the ESOP buys back at an appraised fair market value. ESOP participants must be allowed
to vote their allocated shares at least on major issues, such as closing or selling the company, but are not
required to be able to vote on other issues, such as choosing the board.

Employees also can acquire stock through grants of stock options, the right to buy shares at a price set
today for a defined number of years into the future. There are no special tax benefits associated with most
forms of stock options, however. Employees can also become owners by purchasing shares in a stock
purchase program, usually at a discount, by buying stock in their 401(k) savings plans, or by companies
making matches of company stock to employee deferrals into these plans. Stock in 401(k) plans can be
bought with pretax income, while company contributions are tax-deductible.

Altogether, there are about 11,500 ESOPs covering 11 million employees, almost all in closely held
companies. The other forms of ownership generally occur in public companies, and another estimated 15
million employees participate in one or more of these plans (see data from the National Center for
Employee Ownership).
[edit]Disadvantages to employees
Diversification has been cited as an issue, and there are examples to support this belief. Employees at
companies such as Enron and WorldCom lost much of their retirement savings by over-investing in
company stock in their 401(k) plans, though these specific companies were not employee-owned. Studies
in Massachusetts, Ohio, and Washington state, however, show that, on average, employees participating
in the main form of employee ownership, employee stock ownership plans (ESOPs), have considerably
more in retirement assets than comparable employees in non-ESOP firms. The most comprehensive of
the studies, a report on all ESOP firms in Washington state, found that the retirement assets were about
three times as great, and the diversified portion of employee retirement plans was about the same as the
total retirement assets of comparable employees in equivalent non-ESOP firms. Wages in ESOP firms
were also 5% to 12% higher. National data from Joseph Blasi and Douglas Kruse at Rutgers shows that
ESOP companies are more successful than comparable firms and, perhaps as a result, were more likely
to offer additional diversified retirement plans alongside their ESOPs. The data is also available
at www.nceo.org.

Employee ownership in 401(k) plans, however, is more problematic. About 17% of total 401(k) assets are
invested in company stock—more in those companies that offer it as an option (although many do not).
This may be an excessive concentration in a plan specifically meant to be for retirement security. In
contrast, it may not be a serious problem for an ESOP or other options, which are meant as wealth
building tools, preferably to exist alongside other plans. Detailed data on 401(k) plan investments are
available at www.ebri.org, the home page of the Employee Benefits Research Institute.

[edit]Accounting for ESOPs

ESOPs in the U.S. are not subject to the accounting rules for stock option plans and other equity
instruments. ESOPs in the U.S. are a specific kind of plan set up by U.S. law. The term "ESOP" is often
used generically for employee ownership, especially in India, where it refers to employee stock option
plans. That can cause a great deal of confusion and readers should be aware of just how the term is
used. In the U.S., ESOP companies take a compensation charge for contributions to the ESOP when they
are made.