When you have worked hard to establish and build your small business, why in the world would you consider sharing the ownership of that business with your employees? The answer is the same answer you use in making your other business decisions—it could be good for business.
First, the term “ownership” can be confusing. It is important to understand that offering your employees a piece of the pie does not make them part of the management team. Legally, ownership of a business consists of the basic rights to gain benefits from the profits of that business and to make decisions about running that business and/or selling all or part of that business. With shared ownership, your company still needs a leader or a team of leaders at the helm.
In companies without shared ownership, on the other hand, employees earn some of the company’s income through their wages but have no other rights. In order to offer shared ownership of your company to your employees, you need to look at the legal structure of your business. If you have a sole proprietorship, your business property, your income and your liability are yours as an individual. In order to share ownership with your workers, you will need to set up a partnership or to incorporate your business.
When carefully set up and managed, shared ownership can have big benefits for owners and employees alike. However, like any important business decision you make, you need to research it carefully to see if it is right for your particular company. To help you make the decision, let’s look at the advantages and disadvantages of sharing ownership with your employees.
Pros of Sharing Company Ownership
It helps you attract and keep good employees. An employee-sharing program can be an attractive benefit when you are looking for new employees. Employees today desire more than just a paycheck; they want to feel that they are contributing to something. By creating a culture of ownership, you can minimize employee turnover and motivate your staff to work harder.
A study by Rutgers University found that annual sales growth as well as growth in sales per employee was 2.4 percent higher at companies that had employee stock-ownership plans (ESOPs) than at other companies. Please note that this benefit will only be realized if management maintains open communication with employees.
It is good for your bottom-line. One way to offer shared ownership is by lowering employee wages in exchange for your employees purchasing company stock. This process will help lower your expenses at a time when you may need to raise capital. Also, when employees are invested in the success of their companies, they tend to work harder and more efficiently, which in turn can increase your profit margins.
It lessens the burden. Sharing the ownership of your business, whether it is with a few people or a few dozen people, can take away some of the heavy load you are under as sole proprietor. For some small business owners, having a shared ownership program helps them plan for trips and for retirement without feeling as if they are irreplaceable.
It has tax benefits. Certain employee ownership structures qualify for tax benefits. According to the National Center for Employee Ownership, tax incentives for ESOPs provide advantages for both the company and its employees. These tax issues are complex, so consult with your accountant about how this advantage could work for your company.
Disadvantages of Shared Company Ownership
It can put employee focus solely on profit. For certain employees, having a stake in the profits may cause them to concentrate more on the ends rather than the means. In other words, employees may be so motivated by making more profit that they think less about the process or about ideas and innovation.
If, for example, your staff begins to push product to customers rather than to build relationships with customers, your carefully built reputation could be damaged.
You will lose some control. The flip side of lessening your burden with employee sharing is losing some control of your company. When properly managed and maintained, employees will own a minority of the company’s stock. However, particularly as you look to attract new top team members, there is a chance that you will give up more control than you would like.
Depending on the size of your business, the new plan may be costly in the long run. In the initial stages, a profit sharing plan can bring in some much-need capital, but after time, that advantage lessens and you are left sharing more of your profits with your workers.
In addition, you may need to provide more transparency about your finances than you would like. State laws frequently grant employee shareholders the right to view all company financial records and meeting minutes.
So, in the end, is ownership sharing the right thing for your small business? The answer is a definitive maybe. Weigh the pros and cons as they pertain to you as an individual and to your business, and then talk with your attorney and/or tax advisor to decide what is best for your particular situation.