Employee owned companies offer a few advantages. Among them are attracting and retaining top talent, lowering expenses while increasing profits, reducing the burden on “the” business owner since all employees are responsible for the company’s success, and there are some tax advantages to consider as well.
Research published in Harvard Business Review further reveals that employee owned companies often have higher levels of performance and typically grow faster than companies that are not owned by employees. For owners who are looking to sell the company but are unable to find a qualified buyer, offering employees shared ownership provides the option of letting them purchase it when “the owner” wants to get out.
How do you create an employee owned small business (which, for purposes of this article, is any business that has 20 employees or less who are not provided ownership via stock option) and take advantage of all of these benefits? Follow these basic steps.
Step 1: Decide Your Legal Structure
The National Center for Employee Ownership (NCEO) explains that there are a variety of options for legally structuring employee owned companies. They include the following options.
- Partnership. This option is best if the business is super small, as in just a handful of people (five to six at most), because if just one person wants to leave the company at any point in time, the entire partnership has to be dissolved. One pro of partnerships though is that they are also fairly inexpensive to create.
- Limited Liability Corporation (LLC). With an LLC, employees can purchase their portion of membership via capital interest or profits interest. With capital interest, if the business is liquidated, the employee receives his or her proportionate share of the assets and a portion of the profits accrued since receiving interest.
- Direct Share Ownership. Another option is to give or sell shares of your company to your employees. This is called direct share ownership. There are certain requirements involved if employees are allowed to buy shares of your company, such as asking for an exemption from Section 701 of the securities registration if you’re a private company. These requirements make it imperative that you are well informed before this is the option you choose.
- Cooperative. The oldest form of employee owned small businesses in the nation, cooperatives give each employee one vote in the decision-making process. That is, unless they are new employees, in which case they generally don’t receive ownership until they complete probation.
Each of these legal structures has pros and cons. That’s why it is always recommended that you check with your tax attorney or accountant to identify the best legal structure for your employee owned small business based on your specific situation.
Step 2: Define the Company’s New Organizational Structure
Just because all of the employees will have ownership in the company does not mean that they will all participate in every decision that has to be made in the business. Therefore, you also need to determine the structure of the employee owned company, so everyone knows who is responsible for specific decisions.
For instance, will major decisions be made by a vote of all employee owners or will you establish a board of directors and enable this small group of people to take whatever actions they deem necessary to effectively run the business? If a vote is deemed the appropriate route, how will that vote occur? Will each employee’s vote be counted equally, or will more senior employees’ votes carry more weight?
Step 3: Create Guidelines to Becoming an Employee Owner
There are also considerations that need to be made when bringing new employees in. Put another way, at what point does someone who was just hired become a co-owner in the business? Are they granted this opportunity from the first day on the job, or are they provided this perk only after they’ve been with the company a specific length of time? Additionally, do they have to buy in to become co-owner, or are they simply vested?
Having these guidelines in place helps everyone understand exactly when ownership is an option and what is required to earn that right.
Additional Considerations Before Establishing Employee Owned Companies
If you’re considering turning your company into an employee owned small business, there are a few additional questions you may want to ask yourself to determine if this is the best option for you.
One is whether you’re willing to trust all of your employees to make the decisions that need to be made for the business. If you do, it’s easier to turn control over to them because you know that they’ll do whatever is necessary to take your company where it needs to go. If you don’t, an employee owned business may not be the best option for you.
Also, what is your end goal with the company? When you’re ready to hang up your shoes as a small business owner, is your goal to simply sell your company for a profit, providing you enough money to fund a comfy retirement, or are you equally (if not more so) concerned about making sure your employees are taken care of when you decide it’s time to let go?
The more you want to look after the people who have helped you build and grow your business to where it is today, the more offering them ownership stake makes sense. It also gives you the opportunity to let your legacy live on, not only through the business itself, but also through the people who’ve participated in the journey along the way.
