Employee-Owned Companies are not for everyone. However, when the fit the situation, they can be incredible.
What are Employee-Owned Companies?
Employee-Owned Companies are exactly what they sound like. Employees own at least part of these companies. Usually, the employees actually own less than half of the company.
The main advantage to having an employee-owned company is the fact that your employees will take agency in the success of the company as a whole. This can add a huge incentive to your employees. There can also be tax, estate planning, insurance, and other benefits. These are not as large, and they depend largely on how you setup the employee-owned portion.
The major disadvantage to employee-owned companies is the fact that you don’t control 100% of the company anymore. Even if you maintain a majority ownership, your decisions must take into account the minority owners. All owners also have rights. For example, you have to respect their rights when issuing new shares or changing your governing documents. You can set up your company in a way to minimize the effect, but it will never be completely erased. Additionally, giving up part of your company means less profit for you. However, it is possible, and even likely, that your overall profit will increase to the point this makes little to no difference.
Setting It Up
First, you have to determine whether your entity is an LLC or a corporation. Realistically, these are the only two entity types that can be owned by employees. If you haven’t already set one up, you will next need to setup the legal entity. A corporation is probably best in this case. Transferring stock is an easier legal concept than equity in an LLC. Next, you need to determine the rules for how an employee will get ownership in your company and how much. For example, you can setup an employee stock option pool. Alternatively, you can give every employee X percent of your company at a certain milestone. This largely depends on what type of entity you have and your goals.
Fortunately, the maintenance of employee-owned companies is exactly the same as the maintenance of well-run, privately-owned companies. You have to have annual meetings, records of all meetings, separate bank accounts, and all the corporate formalities. These things are necessary to protect the corporate veil. The major difference is the number of owners notified for meetings and other formalities.
If you’d like to setup an employee-owned company, we’d love to help. Feel free to contact us using the form below. Additionally, we can be contacted by emailing firstname.lastname@example.org or by calling 919-912-9640.