The Tax Code Is Failing Employee Ownership: It's Time for a New Framework
Many young entrepreneurs start businesses with an implicit promise—not just to their customers and investors, but to their employees. They want to build something great, together, and when success comes, they want to share the rewards.
But when it comes time to deliver on that promise, U.S. tax law stands in the way. Our system makes it easy to pay wages and bonuses, but exceedingly difficult to transfer meaningful ownership or wealth to employees without triggering significant tax consequences. If we are serious about closing the wealth gap and fostering a new era of shared prosperity, we need a legal and financial framework that allows entrepreneurs to share the success of their companies without unnecessary tax burdens.
The Problem: A System Stuck in the Past
The current tax code treats almost any transfer of ownership as a taxable event. If a founder wants to gift shares to employees, the IRS deems it taxable income at the fair market value. That means employees, who may not have the cash to cover the tax bill, are effectively locked out of ownership unless they buy in—which defeats the very purpose of sharing wealth in the first place.
Stock options and restricted stock units (RSUs) are often touted as solutions, but they come with limitations. Options typically require employees to purchase shares at a set price, which can still be prohibitively expensive. RSUs create taxable income when they vest, even if the recipient doesn’t sell their shares—again forcing employees to pay taxes on paper wealth they can’t easily convert to cash.
Meanwhile, Employee Stock Ownership Plans (ESOPs), the primary government-sanctioned vehicle for broad-based employee ownership, are complex, expensive, and primarily geared toward larger, mature businesses. For most startups and growth companies, they’re simply not a viable option.
The Result: Employees Are Excluded from True Ownership
The net effect of these outdated policies is that many employees, especially in high-growth startups, work for years creating immense value without ever having a realistic path to ownership. When companies do well, early investors and executives see their wealth multiply, while the employees who helped build the company are left with little more than their salary and a thank-you note.
For a country that prides itself on entrepreneurship and economic mobility, this is an unacceptable outcome. We need a better way.
A New Framework for Employee Ownership
The U.S. should create a modern, flexible legal framework that allows founders to share ownership and wealth with employees without creating immediate tax burdens. Here are three potential solutions:
Deferred Taxation on Equity Transfers – The IRS should allow founders to transfer shares to employees without triggering immediate taxation. Instead, taxes should be deferred until employees sell their shares, similar to how capital gains taxation works for investors. This would allow employees to participate in ownership without an upfront tax penalty.
Founder-to-Employee Trusts – A new type of legal entity could be created, allowing founders to allocate a portion of their ownership into a trust for employees. This trust could hold shares and distribute proceeds tax-efficiently, similar to how charitable remainder trusts function for philanthropy.
Expansion of ESOP Alternatives for Startups – The U.S. should create a simplified, low-cost alternative to ESOPs that works for smaller, high-growth companies. A “Startup Employee Ownership Plan” could allow businesses to allocate equity to employees without the regulatory overhead of traditional ESOPs.
Ownership Shouldn’t Be a Privilege
If we want a fairer economy—one where employees share in the wealth they help create—we need policy changes that make true ownership possible. The intent of taxation should be to ensure fairness, not to prevent entrepreneurs from rewarding their teams.
It’s time for a 21st-century approach to wealth-sharing in business. America was built on the idea that hard work and ingenuity should be rewarded. Let’s make sure that applies not just to founders and investors, but to the people who help bring big ideas to life.