Frequently Asked Questions About Business Conversions

What is a Worker Cooperative?

A worker cooperative is a firm where the employees own all or at least a majority of the company. Workers are entitled to own only one voting share and when owners vote on issues, they do so on a one person, one vote basis. Membership in a worker co-op also entitles you to a share of the profits in proportion to the labor contribution each member made.

What is an ESOP (Employee Stock Ownership Plan)?

An ESOP is a specialized stock bonus plan that is allowed to invest primarily in employer stock. ESOPs are governed by both the Internal Revenue Service and the Employment Retirement Income Security Act (ERISA). In an ESOP, workers do not own the stock of the company directly, but rather through a trust.

What is the Difference Between a Co-op & an ESOP?

The key distinctions between co-ops and ESOPs is how the ownership is held. In a co-op, workers control the shares directly, while in an ESOP the shares are held in trust for the employees. The practical distinction between the two are the regulatory burden each carry and the requirement that workers have a real role in the governance of a co-op. ESOPs are regulated as part of ERISA, and as such, they are ‘qualified’ retirement plans that require engaging a trustee, and annually completing an audit, an independent valuation, and other filings with the Department of Labor. For more on these differences click here (https://ica-group.org.previewdns.com/2897-2/).

Is a Conversion a Sale?

Yes, when you convert to a co-op, ESOP, or a hybrid form of employee ownership, you generally are selling your business to your employees. It is possible to simply issue new shares that employees buy, but even in that case, it constitutes a sale of stock.

Do the employees have to raise the funds to buy the company?

Not necessarily. There are many ways to structure a conversion to a democratic firm. The most common practice is for the seller to finance the transaction, or for both parties to secure financing based on the future earnings of the firm. In both these cases, the workers do not have to raise the funds independently. When choosing a co-op conversion, employees will have to buy a membership share, although the price of this share varies widely. The employees can buy the company outright, either by raising the funds themselves or through selling preferred shares.

Does every employee have to join the co-op?

Membership in a co-op must be open to everyone who works at the firm, however, eligibility criteria can be tailored to meet your particular company’s needs. Many co-ops limit membership to full time staff, or require that members work a certain number of hours before they are eligible. While generally, the minimum requirement is 2,000 hours or one year of service, some co-ops require significantly more time. Generally, the co-op Board of Directors or the Membership also have to approve membership and considerations such as participation, enthusiasm or the ability to buy a membership share can be considered. Whether your firm will allow non-members to work at the firm is an important decision.

Will my bank, lawyer, or accountant understand the co-op structure?

It’s true that the cooperatives are not well understood by most banks and other financial consultants. However, ICA can work with your trusted aides to help them understand the ways co-ops are different and the ways that they are no different than other businesses. To address this, we engage your lenders early in the process to ensure they are comfortable with the transaction. There are also numerous financial institutions that focus on lending to co-ops (including ICA’s affiliated loan fund, LEAF) that can be of assistance.

Will my employees be able to take on the task of becoming owners?

Absolutely! Becoming an owner takes training and work, but ICA and other training organizations (such as the Democracy at Work Institute, Ownership Associates, Praxis Consulting, and CDI) can help you build an ownership culture at your firm. The experience of thousands of employee owned companies have demonstrated that with the right kinds of support, not only can workers become effective owners, but that employee owned firms can outperform their conventionally structured competitors.

Who manages an employee owned company?

In all likelihood, the same people who manage it today. There are as many ways to manage a company as there are companies and managers. The key distinction between a traditional corporation and a democratically managed firm, is that in a democratically managed firm, the workers have control over the culture that is created. Generally, however, the general manager is selected by the Board of Directors. The general manager is responsible for implementing policies established by the Board and coordinating day-to-day operations, just as in a traditional corporation.

Managers in an Employee-Owned Company usually develop a participatory style, encouraging input and ideas from all people in the company.

Will employee ownership work in my industry?

The experience of the more than 7,000 ESOPs in the US demonstrate that shared ownership can work across multiple sectors. More important than your industry, is whether you have the right attitude. For more information on whether employee ownership is right for your company, click here.