New social enterprises in the health sector will be offered uncontested contracts for up to three years.
Department of Health guidance published this week for staff wishing to use their right to request to set up a social enterprise said that after three years the contracts would be tendered openly "in line with the growing contestability of community health services".
The DH also set out the steps NHS staff should take to ensure proposals were strategic and met governance and legal requirements.
It warned that risks include the possibility of failure and insolvency.
Although NHS staff transferring to a social enterprise will be able to take their NHS pension entitlements with them, they will not automatically be entitled to any subsequent improvements in NHS terms and conditions of employment.
A report by the Employee Ownership Association used the social enterprise Central Surrey Health as an example of the benefits of employee owned businesses. Its author Charles Leadbeater said promoting more employee owned organisations should become a priority for public service renewal.
"Co-owned public service organisations are well placed to innovate," he said. "Co-owned organisations appear to be less risk averse, more curious, collaborative and committed to innovation than pure public sector organisations, which tend to be more rule bound."