Overview of Employee Ownership

Chapter 2 · Employee Ownership as Economic Development

By Julien Rosenbloom · September 2026 · 3 min read

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Employee ownership is a distinctly American tool capable of building generational wealth, fortifying national economic security, and improving firm performance. Three structures account for nearly all forms of broad-based employee ownership in the United States: Employee Stock Ownership Plans (ESOPs), worker cooperatives, and employee ownership trusts (EOTs).

An ESOP is formally a retirement plan governed by the Employee Retirement Income Security Act of 1974 (ERISA), which created the structure with broad bipartisan support, and is the only such plan that can borrow money to buy stock in the company that sponsors it.23 At once an employee retirement plan and a corporate finance vehicle, this distinct configuration is what lets the ESOP acquire a departing owner’s company on the workforce’s behalf. With approximately 6,500 ESOPs in the United States, they are by far the most common form of employee ownership.24 Worker cooperatives, owned and governed by their members on a one-person, one-vote basis, are far fewer and tend to be much smaller (as of 2025, there were at least 820 known worker cooperatives in the United States).25 Employee ownership trusts (EOTs) are a newer perpetual form of ownership, where the trust holds the company perpetually on behalf of employees. It is primarily a profit-sharing vehicle and does not involve individual share ownership and capital appreciation.26 Both worker cooperatives and EOTs are important forms of employee ownership, particularly for firms so small that an ESOP’s fixed costs are prohibitive (businesses with fewer than 20 employees are generally too small for an ESOP and better suited to these structures).

Because most ESOP trusts borrow money from external investors—banks, selling shareholders, and investment firms, for example—they are, by definition, leveraged transactions. The mechanics of a leveraged ESOP involve establishing a trust for the employees,27 borrowing money to buy out the owner’s shares, and repaying the acquisition debt through future cash flow. As the debt is paid down, shares are released proportionally into employees’ accounts until the ESOP (and therefore the workers) owns the company outright.28 A core feature of the ESOP is that employees put in no capital of their own, nor should they. Their equity in the company is funded by the company’s free cash flow and comes on top of their wages,29 rather than coming at the expense of a payroll deduction. This is also why employees cannot finance the transactions themselves and why the transaction must be underwritten according to the ability of the business to repay the acquisition loans. Another core feature is the repurchase obligation: when an employee leaves, the company must buy back their vested shares.

The federal tax code makes this structure attractive to both the seller and the newly formed ESOP. A retiring business owner can defer capital gains on the sale of their business to an ESOP, and a company wholly owned by an ESOP and organized as an S corporation owes no federal income tax on the ESOP’s share of earnings (more details in the Tax Incentives portion of the State Finance Toolkit chapter).30 The empirical evidence around employee ownership shows that it functions as a comprehensive strategy for building worker wealth, improving firm performance, and strengthening economic resilience. ESOP participants hold more than double the retirement assets of workers at comparable conventional firms.31 For low- and moderate-income workers, their ESOP account is frequently the largest financial asset they hold, and because of the mechanics of the leveraged ESOP transaction, they come to own it without foregoing any discretionary income.32 As for firm performance, research shows that ESOP firms experience significantly higher sales growth compared to non-ESOP firms.33 As for employment, one study shows that ESOP employment growth rates were 3.8 percent higher per year in the post-ESOP period than pre-ESOP projections suggested.34 The economic resilience evidence is similarly compelling.

In the 2014 General Social Survey, 1.3 percent of employee owners reported having been laid off in the prior year, against 9.5 percent of other workers. In another study, Kurtulus and Kruse find that employeeowned firms shed fewer jobs and survived at higher rates through both the 2001 and 2008-2009 recessions.35 Decades of research on ESOP firm performance and broader economic benefits show that employee ownership represents a strategic investment in economic resilience and dynamism, firm performance, and worker wellbeing.

Sources

Source numbering follows the full playbook.

  1. Jack Moriarty, Financing the Growth of Employee Ownership: Policy Landscape Report, Lafayette Square Institute, “How Do ESOPs Work?”
  2. National Center for Employee Ownership, Employee Ownership by the Numbers (updated 2026).
  3. Democracy at Work Institute and U.S. Federation of Worker Cooperatives, 2025 Worker Cooperative State of the Sector (2026).
  4. Morgan Stanley, Employee Ownership Investing: Supporting Wealth Creation (May 2026).
  5. Moriarty, Financing the Growth of Employee Ownership (“all full-time employees are required to be eligible for the ESOP plan”).
  6. Moriarty, Financing the Growth of Employee Ownership.
  7. The academic literature finds a modest wage premium for workers at ESOP companies; see Douglas Kruse, “Does Employee Ownership Improve Performance?,” IZA World of Labor (2016).
  8. Internal Revenue Code § 1042 (the selling owner’s capital gains deferral) and the S corporation ESOP federal income tax exemption.
  9. Nancy Wiefek and Nathan Nicholson, S Corporation ESOPs and Retirement Security, National Center for Employee Ownership (Dec. 2018).
  10. Janet Boguslaw and Lisa Schur, Building the Assets of Low and Moderate Income Workers and Their Families: The Role of Employee Ownership, Institute for the Study of Employee Ownership and Profit Sharing, Rutgers School of Management and Labor Relations (2019).
  11. National Center for Employee Ownership, “Research on Employee Ownership,” nceo.org (ESOP companies’ sales growth 3.4 percent per year higher in the post-ESOP period than pre-ESOP projections suggested).
  12. National Center for Employee Ownership, “Research on Employee Ownership,” nceo.org (employment growth 3.8 percent per year higher in the post-ESOP period than pre-ESOP projections suggested).
  13. National Center for Employee Ownership analysis of the 2014 General Social Survey (1.3 percent of employee owners reporting a layoff in the prior year, against 9.5 percent of other workers); Fidan Ana Kurtulus and Douglas Kruse, How Did Employee Ownership Firms Weather the Last Two Recessions? (Kalamazoo, MI: W.E. Upjohn Institute, 2017).