Employee Ownership

Employee ownership is when employees own a significant stake in the company either:

• Indirectly through an Employee Ownership Trust (which holds the shares for the benefit of the employees), or
• Directly by owning shares personally in the company, or
• Through a hybrid model combining both direct and indirect ownership

Our experienced Corporate lawyers can help you decide which of these employee ownership models would work best for you and your business situation.

Employee ownership can work for all sizes of business, from small tech start-ups to retail giants, and across a range of sectors, from food and drink, financial services and care to engineering and manufacturing. And it can work at any stage of business growth:

• Start-up stage - Entrepreneurs starting up a company may want to set up the business as employee owned, as it can boost commitment and enable the business to retain and recruit talent, as the individuals have an ongoing stake in the business’s success.
• Development stage - Moving to an employee-owned structure may work for companies where shareholders wish to sell shares to release capital, or management are looking to lead an employee buyout.
• Exit stage - An employee-owned model can play a key role in succession strategy for certain business owners, particularly those with family-run businesses. Looking to exit but concerned to ensure what they have built up continues with the right ethos and employees stay on, owners can find transitioning to an employee-owned model gives them the flexibility, financial result and outcome they want.

If you are thinking of setting up an employee-owned business, you need to consider several key aspects:

• Finance – the value of the business, how the deal will be financed and any tax issues
• People and governance – including engagement with employees and managing the employee experience
• Legal – how it is structured and what protections need to put in place

Working with you, we can explore the business model options available to you and guide you through the whole process if you decide to move to an employee-owned structure.  

There are significant tax benefits to setting up an employee-owned company, for both the owners and employees.  At this time, these benefits include:

Capital Gains Tax relief – If an owner sells more than 50 per cent of the company shares to an Employee Ownership Trust,  they qualify for Capital Gains Tax relief on the sale.

Tax-free bonus – Employees of an employee-owned business can receive a tax-free bonus of up to £3,600 a year.

In addition, moving to employee ownership can give company owners exit flexibility, with a phased sale. Staged buyouts enables them to continue to keep a stake in the business for a time, helps business continuity and means manageable payments for the employees.    

At Thorntons, we can advise you on the tax benefits of moving to employee ownership and explore the best options for you and the business. 

Some form of finance is usually needed for an employee buyout, as it is unlikely the employees themselves will have the funds to buy the business outright. Finance options include:

• Borrowing – Whether from the bank or other lenders, the loan will then need to be repaid from company reserves or profits over a set time period.
• Deferred basis – Payments will be made over time using existing cash and reserves. Some may be paid on completion of the deal or all may be deferred.
• Transaction financed by company-based performance – This is where the owner is paid over a number of years from future company profits.

The company will need to be valued by an independent third party, such as appointed accountants, as part of the financing deal. We can put you in touch with trusted third parties and work with them and other stakeholders to help make the change to employee ownership as smooth as possible.