Employee ownership is often misunderstood, especially when it comes to applications within small businesses. In this blog, we will discuss common myths and highlight the benefits of employee ownership models like phantom stock and employee stock ownership plans (ESOPs), especially highlighting their tax advantages and suitability for small businesses.
Myth 1: Losing Control of Your Business
One common concern is that providing employee ownership means you’re giving up the control you have in your business. However, financial instruments like phantom stock allow you to maintain complete control and ownership. Under these types of plans, employees receive a stake in the company’s success without actual equity. This means you can share owner-like benefits without compromising your control or decision-making power.
Myth 2: Complexity and High Costs
Another myth is that implementing employee ownership is complicated and expensive. While this is true for some options for offering employee ownership, phantom stock offers a straightforward and cost-effective approach. Unlike traditional equity, it often doesn’t require a formal valuation of the business or complex legal work. Businesses can often leverage tax benefits when implementing these types of plans, which makes them more appealing.
Myth 3: Difficulty in Selling the Business
Some business owners fear that employee ownership complicates the process of selling the business later. In reality, employee ownership can increase your company’s attractiveness to potential buyers. It provides continuity and commitment from employees, which is appealing to the successors. Furthermore, it opens up the option of an employee buyout, offering a viable exit strategy that can be simpler and more rewarding than selling on the open market.
The Truths About Employee Ownership
Succession & Ownership Transition
A significant advantage of employee ownership, particularly through phantom equity, is its role in succession planning. A staggering 80% of small business owners lack a formal exit strategy. By integrating an employee ownership model, you can address both current retention challenges and future succession planning, potentially paving the way for an employee buyout.
Increased Productivity
Research consistently shows that employee ownership boosts productivity. When employees have a stake in the company’s success, they are more motivated and engaged. This increase in productivity not only benefits the business’s bottom line but also fosters a more committed and cohesive workforce.
Enhanced Business Growth
Businesses with an employee ownership model tend to grow faster and are more resilient than those without. This growth is often attributed to the increased innovation and dedication of employees who have a direct stake in the company’s success. Moreover, the tax benefits associated with models like phantom stock and ESOPs provide additional financial incentives that can be reinvested in business growth.
Conclusion
Employee ownership, through mechanisms like phantom stock or ESOPs, offers a versatile and beneficial option for small business owners. With myths of complexity and loss of control now off the table, small businesses can evaluate the tangible benefits like tax advantages, increased productivity, and viable succession planning. As more businesses embrace this model, it’s likely that the advantages of employee ownership will become even more evident, making it an increasingly popular choice for small business owners looking to secure the future of their companies.
