Employee Ownership (EO) is becoming an ever more important part of the corporate landscape. Reports in recent years have shown that many EO businesses outperform and outlast more traditional businesses. Stephens Scown gained quite a lot of coverage in the legal media recently as a consequence of becoming the largest employee owned law firm in England & Wales. In this article I look at EO and how it can be structured.
Types of employee ownership
Businesses can be run in various formats ranging from sole traders to partnerships, companies and Limited Liability Partnerships . Within the corporate setting, the most appropriate business models to consider EO are companies. Other models are possible, but the best supported is EO within a company setting.
There are three main types of EO:
- Direct employee ownership
- Indirect employee ownership
- Combined/hybrid direct and indirect ownership
Direct employee ownership
Under the direct ownership model, employees are able to become individual shareholders of shares within their company. The employee acquires a right to a dividend and a vote on company matters by virtue of their share.
In some scenarios employees also have the chance to sell or acquire more shares in the company through an internal market or by way of share issues.
The benefits of direct ownership includes the tangible holding of shares in the company, in which the employee works, giving them a sense of real ownership and influence over their employment and how the business is run.
Direct ownership does have the potential drawback of creating greater internal administration in maintaining the books of the company and facilitating share values and transfers.
Indirect Employee Ownership
Under the indirect ownership model, all employees become beneficiaries of a trust which holds some or all of the company shares for the employees. The employees may elect trustees or participate in an employee council which in turn influences the direction and strategies of the business.
Whilst this model circumnavigates the issues mentioned above regarding direct ownership and eases the potential administration of direct ownership it may have the disadvantage of leaving employees less tangible sense of ownership of the business.
Although this model appears to be more flexible, it is important to note that creating a trust creates a number of formal and administrative requirements, including the drawing up of a trust, appointing of trustees, and administration of the trust.
Combined Direct and Indirect Employee Ownership
Other variations of the Direct and Indirect models can pick parts of both models, depending on the needs and requirements of the particular business. If there is one thing that is clear about EO it is that there is no one perfect model for every business and innovative businesses have found different models that help them to achieve their desired aims.
Opportunities
EO businesses are regularly identified as being at the forefront of employee engagement and satisfaction. They are also seen as being more resilient and forward thinking. EO is found in virtually every sector from healthcare to manufacturing, retail to professional services; no area is unrepresented. For the purposes of recruiting and retaining the best employees EO presents a very powerful message of employee value and empowerment.
In addition some EO schemes have some potentially important tax incentives. An employee buy out (EBO) of a company as an exit route for retiring shareholders can result in a 0% CGT liability. Employees may also be able to receive as much as £3,600 as bonus, free of Income Tax. Naturally, terms and conditions apply, but for many businesses, not taking account of an EBO potential may be a missed opportunity.
Considering EO?
Having converted to an EO business, Stephens Scown has already experienced many of the positives of EO including greater staff engagement, better customer service and many other details that make a difference to what we do and what that means for our clients. It was certainly relevant in being named UK Law Firm of the year and the highest ranked law firm in the Sunday Times top 100 companies.