This is a guest blog written by Robert Postlethwaite for J Gadd Associates, a business partner of Postlethwaite Solicitors. It first appeared on their website.
Are you thinking of making your company employee-owned?
If so, did you know that there are actually a small number of alternative ways you can do this?
As with most things there is no-one-size-fits-all. The best approach for you will depend on you and your company’s situation. Let’s look at the different options available in more detail…
Employee Ownership Trust
This is by far and away the most common approach. Your shares in your company would be transferred to a trust which would then hold the shares on behalf of the employees. If the trust is a statutory employee ownership trust, all employees will share in the company’s ownership, so this is a good model to choose if you are committed to everyone having a stake. This approach also brings tax incentives, in particular an exemption from capital gains tax if you (and any co-shareholders) sell more than 50% of your company to the trust and also the ability for any subsequent employee bonuses to be free of income tax, so long as all employees receive them.
Employee Benefit Trust
If you prefer a form of employee ownership that allows greater flexibility (in particular if it is felt important to allocate benefit in the trust to selected key or senior employees) you could instead choose a more generic employee benefit trust. However, this option does not bring the same tax reliefs described for an Employee Ownership Trust.
Any form of employee trust will need to be run by trustees. These could include at least one employee, perhaps combined with an independent trustee. The trustees do not run the company, this responsibility remains with the directors and leadership team who will be accountable to the trustees.
Alternatively, you could choose the hybrid approach This would be best for a company that favours an employee ownership trust holding a majority of its shares but also sees an advantage in combining this with personal share ownership. In this scenario individual employees (or some of them) would be permitted to hold shares but the trust would always continue to hold more than 50%.
Where employees hold any shares personally, they will each hold their own share certificate and can receive a profit share through dividends. They can then sell their shares back on leaving the company or perhaps earlier, potentially making a financial gain if the company has grown. They will also have a shareholder vote.
This scenario is often used to:
- enable all individual employees to have their own personal ownership stake alongside a separate indirect stake through the trust, usually by the trust transferring some of its shares to employees
- provide a special incentive for more senior employees, for example through the grant of share options.
Personal shares only
It can also be possible to create employee ownership in your company without involving any kind of trust, although this would be unusual and often complex. Most commonly, it would involve a new company acquiring your shares. The owners of that company would be its employees, each holding shares personally. Usually, this approach is inferior to one that involves trust ownership, but it could on occasion be the best solution.
This approach involves several moving parts, and for a company with large numbers of employees and/or significant staff turnover, it would involve substantial administration.
Can we as the current owners be paid for our shares?
Yes, it is common on a transition to employee ownership, whichever model you intend to adopt, for the current owners to be paid for their shares. Typically, this involves payment in instalments, funded from the company’s profits.
Further information on Employee Ownership available here.
To find out more or if you would like to discuss an approach that would align best with your objectives, get in touch with Robert Postlethwaite, who would be happy to talk in more detail about the different options.