The pros and cons of an employee ownership scheme

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Date: 9 December 2021

Two employee owners celebrate another successful day's business

As a start up, your most valuable asset is your employees, so how can you show them they matter? Employee ownership could be the answer…

Finding good employees is difficult as a new business when you're competing with well-established companies that offer more secured positions. One way to attract decent talent is to introduce schemes like employee ownership that give something back to your staff.

Attracting and retaining employees is just one of the many benefits of these schemes for start ups. This can be seen replicated across a dozen employee ownership case studies in the UK.

But, as with everything in business, there are upsides and downsides. In this post, we're going to share all the pros and cons of employee ownership so you can decide if it's the right fit for your new business. Let's take a look…

What is employee ownership?

Employee ownership is exactly how it sounds; a company that is set up so that all employees are able to acquire shares in it. Employee ownership schemes provide two ways for your staff to own shares in the company:

  • Direct employee ownership: the employee owns shares in the company directly which they can buy at a tax-efficient rate.
  • Indirect employee ownership: the business is owned by a trust who look after the shares on behalf of the employees.

Over two million employees in the UK own shares in their company through an employee ownership scheme. They receive financial incentives, from income tax-free bonuses to national insurance breaks.

These tax advantages are provided by the UK government in an attempt to encourage more companies to become employee owned. The following schemes all come under this umbrella:

Each of these schemes has its own employee and tax benefits, and there are rules you need to follow to be eligible for one. So, it's worth looking into them a little further if you decide to make your start up company employee owned.

What are the pros and cons of making your start up employee owned?

Now that we have some idea of what employee ownership schemes are, it's time to look at the pros and cons of making your start-up employee owned.

Pros of employee ownership for start up tax breaks

As we mentioned in the last section, there are a lot of tax benefits when you adopt a government-approved employee ownership scheme.

If you wanted to set up an employee ownership trust, for example, sales of shares in your company would be relieved from capital gains tax, but only if you sold the majority of shares in the company.

Once your company is owned by one of these trusts, you can pay your employees up to £3,600 in bonuses, free from income tax. This might not seem like a big deal at first but, as a start-up company, being able to reward your staff with bonuses and not lose any of it to income tax will save you a lot of money.

Attract and retain talent

In the introduction to this post, we talked about how difficult it was to attract good employees as a new business. Employee ownership is still a relatively new business model, and with only 730 companies in the UK currently using one, you would definitely stand out.

Also, employees who work hard often want to see a reward for it. So, having a company where your staff earn more money the harder they work, will attract the right kind of people.

Once you have those people through the door, you've trained them, and they become an integral part of the business, they'll be much less likely to leave because their money is tied up in shares in your company.

Share responsibility

Starting a business by yourself can be challenging. By sharing your company with your employees, they'll have more of a say in how it's being run. So, they're less likely to just 'do their work' and go home.

The better the company runs, the more money they make - which will make them care about the success of the company as much as you do. Instead of starting a company on your own you'll be starting a company together.

Make your business perform better

With your employees being more involved in the running of the business and staying with you longer to see the benefit of their shares, you have a valuable reservoir of information to tap into from the minute you start your business.

Hosting regular open forums for staff to discuss issues their department has that need to be resolved and sharing ideas about new ways to promote your products, improve sales, and everything else, will help keep your business agile and stagnation-proof.

Cons of employee ownership for start ups

Lose control

Unsurprisingly, when you give up the majority of shares in your company, and everyone effectively becomes an owner, you lose a certain level of control over the business.

If you fail to keep 75% of the voting shares in your company, it will officially become everyone's company. This can be difficult for a new business owner to accept.

Expensive

Employee ownership schemes are less expensive to set up than they used to be, especially with the tax breaks introduced by the UK government in 2014. That said, they are still an extra expense you wouldn't have to consider if you didn't adopt one.

The short-term costs of drawing up the scheme and getting it approved can eat into your start-up funds for the business at a time where every penny is crucial to staying afloat. You need to really consider whether you can afford it before you decide on an EOS.

Unpredictable

You can only promise your employees that they will see a return on their shares for so long before they consider leaving the company. If you don't start to show profit in the first year, which is very common for start up companies, you could lose key members of staff.

This is made harder by the fact that share prices are volatile and can fall quite easily. The only plus side to this is that most employee ownership schemes have a 'no-lose' failsafe where, if prices drop, employee shares won't drop but they won't increase either.

Think your start up would benefit from employee ownership?

In this post, we've shared the pros and cons of setting up employee ownership for your start-up business.

Hopefully you have a better idea of what employee ownership is and whether it's right for you. If you're interested, it's a good idea to look into the individual types of schemes a little more so you know exactly what the rules are and can gain a little more insight into what it entails.

Copyright 2021. Featured post made possible by Arthur Sullivan, freelance writer.

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