Individual share ownership
If employee ownership is to involve entirely individual share ownership, you should consider how your employees are going to acquire their shares?
- be given shares (these would be subject to income tax & possibly NI on their value when the employee receives them unless they do so through a SIP. However, if the shares are low value the tax consequences may be minimal)
- buy shares (this will not create a tax liability as long as the price paid is at least market value or if the purchase is through a SIP)
- be granted options to acquire shares in the future (no immediate tax liability created but there will be one when the option is exercised, and the shares bought, unless an exemption is available through SAYE, CSOP or EMI.
Consideration should be given to the longer-term ownership of the shares and what will happen for, example, when an employee wishes to sell their shares. It is common to provide in the company’s articles of association that employees wishing to sell must offer their shares internally, and that if they leave they must offer them for sale
Where employee ownership results from transfers by the company’s founders, 100% individual employee share ownership may be complex to structure.
An employee ownership trust (EOT), may be a key component.
This will acquire a majority or significant ownership stake in the company, then hold it long term.
To create an EOT (or any other kind of employees’ trust), it will be necessary to prepare a trust deed which will be formal evidence of the trust’s creation and will set out its terms.
These terms may include how the individuals responsible for running the trust are to be appointed, any particular constraints on what the trust may do with its shares and, if the trust is intended to confer any specific statutory tax reliefs on those who sell to it or employees, (an employee ownership trust), specific provisions required by the tax legislation.
Some do’s and don’ts of employee ownership
- look at other companies that have introduced employee ownership and learn from their experience
- review which form of employee ownership will work best for your company
- think about the intended long term purpose
- if individual employee share ownership is intended, consider how any internal share market will be handled and the tax ramifications
- if an employee ownership trust is intended, do make sure you fully understand the tax requirements of the EOT legislation
- communicate with employees regularly about the company’s financial performance
- ensure you have a capable and committed management team
- establish clear reporting lines between management and shareholders
- consider training for trustees
- look into the financial side carefully. As well as requiring a full and independent valuation of the shares to be sold, it is wise to ensure that the company has carried out careful cash flow planning so that it can confidently fund its EOT to pay all agreed instalments of the purchase price
- consider joining the Employee Ownership Association
- do ensure that your company has an effective plan for leadership succession, if any founders are planning to step back
- appoint trustees exclusively from the board of directors. This could result in personal liability and conflict of interests. Consider appointing employees (perhaps selected by election from amongst the employees) and perhaps an independent person. In any case, directors of the company should be a minority of the trustees
- try to hide bad news. Employees in an employee owned company should be treated in the same way as any other shareholder. They should be notified of bad performance promptly, as well as of what measures are being taken to remedy the situation
- make arrangements too complex. Complexity tends to confuse – this means employees may not fully understand the benefits of the scheme, and also increases the risks of unforeseen consequences
- let tax considerations dictate the structure of your scheme, except to the extent they are consistent with your primary aims
- choose employee ownership unless you genuinely believe it is right in the long term for the company