What happens to the profits in an Employee Ownership Trust (EOT)?

Employee Ownership Trusts (EOTs) have been gaining popularity in recent years as a means of enabling business owners to transition ownership while safeguarding the company’s future. But a common question arises when exploring this model: what happens to the profits in an EOT? Understanding how profits are treated within this structure sheds light on its appeal and operational mechanics.

By Chris Davies

In an EOT structure, the ownership of the business is held in trust for the benefit of the employees. This setup creates a unique dynamic where profits are no longer directed solely to shareholders but are instead utilised in ways that align with the trust’s objectives. Typically, profits generated by an EOT-owned business can serve several purposes. First and foremost, they are often reinvested into the business itself. This reinvestment might take the form of funding growth initiatives, upgrading infrastructure, or bolstering operational resilience. The priority here is the long-term success and sustainability of the business, which directly benefits the employees as beneficiaries of the trust.

Another critical use of profits is to repay any outstanding debt incurred during the establishment of the EOT. In many cases, setting up an EOT involves borrowing funds to buy out the existing shareholders. Once these financial obligations are settled, the business’s profits can be channelled more freely towards other objectives. The repayment phase is pivotal, as it underscores the commitment to financial prudence and ensures the company’s resources are managed responsibly.

A defining feature of EOTs is the potential for employees to receive tax-free bonuses funded by the company’s profits. This aspect adds a compelling incentive for employees, fostering a sense of ownership and alignment with the company’s success. The amount and frequency of such bonuses depend on the profitability of the business and the trustees’ decisions. The trust’s primary obligation is to act in the best interests of the employees, and distributing profits as bonuses can be a powerful way to achieve this goal.

It’s important to note that while employee beneficiaries are central to the profit distribution process, the trustees of the EOT play a crucial role in deciding how profits are allocated. They must carefully balance the needs of the business with the interests of the employees. This balancing act requires a forward-looking approach, ensuring that immediate rewards do not compromise the business’s ability to thrive in the future.

In essence, the profits of an EOT-owned business are managed with a dual focus on sustaining the company and enhancing the welfare of its employees. This model creates a virtuous cycle, where engaged employees contribute to the business’s success, which in turn generates profits that are reinvested or shared among them. By prioritising collective benefit over individual gain, EOTs embody a progressive approach to ownership and profit distribution. They not only offer a viable succession solution for business owners but also pave the way for a more inclusive and sustainable corporate culture.

If you would like to speak to one of our EOT specialists please get in touch.