What Are the Legalities of Employee Ownership Trusts | MinuteBox Cloud Entity Management

What Are the Legalities of Employee Ownership Trusts

Employee ownership trusts (EOT) are legal company ownership structures that allow employees to become shareholders of a corporation without paying directly for those shares. EOTs are common corporate ownership structures in both the United States and the United Kingdom. Both nations have appropriate tax laws and other articles of legislation enacted to support these arrangements.

In Canada, EOTs have been less common, though the Canadian government is eager to change that. In the federal budget of 2022, a new proposal for employee ownership trusts was introduced as an amendment to the federal Income Tax Act. The purpose of the legislation is to encourage more employee ownership of businesses across Canada.

How do employee ownership trusts work?

When a company’s ownership is structured in a way that allows employees to hold shareholder rights without paying for the shares, it is an ownership structure in the form of an employee ownership trust. Shares are held in trusts, and the employees earn value from their shares through a percentage of the company’s profits.

Employees have options to earn additional shares each year they remain employed with the company. When workers choose to leave the company, or retire from the workforce altogether, the business buys back the shares in exchange for cash compensation.

In the US and the UK, data shows that employee-owned businesses are important contributors to local economies. These organizational structures allow businesses to:

  • Accelerate growth with more strategic roadmaps

  • Provide better compensation to retain workforces

  • Decrease the potential for lay-offs in economic downturns

  • Maintain viable jobs to support the economy

The Canadian employee ownership trust legislation

The proposed Canadian legislation was introduced in the 2022 Federal Budget, tabled by Deputy Prime Minister Chrystia Freeland. The proposal includes similar language to the US legislation that enables companies to issue EOTs on behalf of their employees.

According to the National Post, the biggest question surrounding the viability of EOTs revolves around how employee ownership could influence company decision-making and corporate policies. If the final Canadian legislation does mirror its US counterpart, the rights of employees in EOT-backed Canadian businesses will resemble the rights of workers in US companies with employee stock ownership plans (ESOPs).

Under ESOPs, the Board of Directors retains the right to appoint trustees and managing partners of a corporation. Unlike other shareholders, who sit on the Board of Directors as compensation for financial or capital investments in the business, employee shareholders have more limited voting rights on corporate matters. Most of the decisions put towards votes by employees are related to mergers and acquisitions of other companies.

How to track corporate shares issued to employees

If the employee ownership trust proposal in the 2022 Federal Budget is passed into law, Canadian companies will have an organizational structure to issue shares to their employees. This will require a company to make amendments to their established shareholder ledgers, incorporating share issuances to employees in the documentation.

In our guide on how to create the perfect shareholder ledger, we’ve outlined all of the information that is required when tracking and reporting on issued shares. Information that must be reported on within the shareholder ledger includes:

  • The name, home address, and personal contact information of the shareholder that, in this case, is the employee

  • Share certificate numbers that include the date, time, and value of the share transaction

  • The total value of shares owned by the employee shareholder

  • Current and projected capital share structures for the company

How to report employee share ownership using entity management software

Entity management software is a modern approach to reporting shareholder transactions. Unlike paper shareholder ledgers or multiple files stored on various pieces of software, entity management technology includes advanced and intuitive shareholder ledger templates.

This is an innovative approach to share transaction reporting that can be amended to include shares issued as part of an employee ownership trust. The entity management platform saves valuable time on the reporting process and eliminates the need for multiple files to accurately report on shareholder activity.

The technology includes built-in biometric and hardware key authentication, creating a secure environment to store all shareholder records. Advanced search features enable managers of shareholder ledgers to uncover specific shareholders, shareholder transactions, as well as dates and times of those transactions, in a matter of seconds. If there’s ever a dispute or concern about a past transaction, entity management software allows users to find the answers to their questions almost instantaneously.