Pros and Cons
So the pros of having an employee ownership model, so a pro of having employees who have some sort of ownership, whatever that may be, right? Whatever percentage that may be, however they may be paid, um, whether they’re paying it, they’re getting money now or they’re getting it later, these are kinda the pros. So one of the pros is that any size business can have a structure like this. So it doesn’t necessarily require a certain growth or certain sales amount or a certain, it could be any size of business.
Atty Michael Jonas (04:44):
It could be one person, three people. It could be a size, uh, company the size of 300. That’s a pro. Um, the other thing that employees in a structure like this are often more motivated or more interested in staying with the company because if they know that they have ownership of the company in some sort of degree, they may wanna stay and either see that through until the the ownership best or they wanna see it through because, um, they know that having an ownership stake, they have the ability to vote on things that occur. They have a say in in the environment that they may be working in. And so there’s a little bit tighter of a closeness to the company itself. It’s not just a job, right? It’s a job that I have ownership in or a company that I have ownership in. Um, the other, uh, thing is during recession and downsizing, um, inflation recalls, that’s just the pandemic here as well.
Atty Michael Jonas (05:46):
Media issues. So like there’s an issue with the CEO or there’s a recall, any of these things, employee companies who have some employee ownership, they seem to have a much better retention rate for employees that are willing to weather the storm. This doesn’t mean that because you have an ownership model, nobody’s gonna leave or you’re not gonna have employees quit. But having an employee ownership model often leads people to stay during these, um, up and down issues, right? Uh, the next pro is that management or owners of employee-owned companies make decisions not just for themselves. They know because their model is employee owned, that the, that the decisions that they’re making are going to affect the owner. So not just someone who I just hired that may be working here for a summer. I’m gonna make a decision as an owner in a way that treats the, the company and the people who are working there as having a stake in the decisions that I make.
Atty Michael Jonas (06:51):
So sometimes the decisions that you make as an owner of a business, they’re gonna be more intentional because you know that the employees are owners as well. So that’s one of the pros. And then, um, the wealth gap of, uh, the wealth gap of wealth and raise. It’s decreased when employees also own part of the company. Um, I mean, you can imagine why. So you are giving not just the pay, you’re giving ownership into potential future distributions or potential, you know, if the company ends up selling and there’s a profit, if the employees own a percentage of that and the company does really well and sell, then that’s, that’s dollars for them, not just the job or a week to week. Um, it’s giving people ownership that they didn’t necessarily have. Um, and then the other piece is there are some employee-owned companies that have tax deferred retirement plans.
Atty Michael Jonas (07:46):
We can get into that. Again, I’m not a tax expert, but there’s ways that, um, giving ownership instead of doing 401k or instead of doing some other type of benefit, um, this ownership plan may actually be better for you and better for the employee in a tax sort of way, if that makes sense. And then employee ownership can also help with an owner’s exit strategy and with succession planning. So if you created a really great business and you’re worried that when you retire or you pass away or things go bad that you know it’s, it’s you, you’re the key person and that’s it, and the company’s done, and maybe you’re doing a business that’s very closely tied to the community, you wanna make sure that the purpose of the company lives on. It allows the owner to think about ways that are intentional for the company to move on.
Atty Michael Jonas (08:40):
So that if I know that if I leave this business is gonna continue to do good things in the community, and I am, I am figuring out my exit strategy now by planning, um, to have employees own. So these are some of the pros that I on here. Of course, there’s other, other cons. So what are some of the cons? Cause employees are owners, it may actually be harder for the owner to walk away. Why? Because they’ve built relationship with their employees. When I walk away, it means that you may want to stay and consult. You may want to make sure that the people who, um, own, make a profit and do really well. Whereas if you owned it entirely and you just sold it to a random person, you might not necessarily care as much. So not that that’s a bad thing, but it, it doesn’t necessarily give you the option to just call it quits because you care about the employees that have become owners as well.
Atty Michael Jonas (09:44):
So you’re a little bit tied closer to that. Um, the potential con is ownership doesn’t necessarily mean control. So depending on the ownership model, you can give ownership, but it doesn’t necessarily mean that they have voting rights or managerial rights, right? And what do we mean by that? Um, someone may have an ownership as an employee, but they may not vest yet. It may take, you know, a certain amount of years or they may be an owner, but they may not become a partner, right? They might, they may not have the decisions to make managerial decisions, um, or have the authority to sign contracts and things like that. So there is limitations. Cause if we want them to be a partner, we can make them a partner. But just because we give ownership doesn’t mean that they have the same responsibilities that a partner might have.
Atty Michael Jonas (10:38):
Um, another con is changing a company’s structure is not enough to help employees stay or keep them motivated. Just because you do one of these employee ownership, uh, plans doesn’t necessarily mean that they’re gonna stay or be excited about it or, or, you know, continue to be involved. Um, there is typically with, with these types of arrangements, there’s typically an obligation for employee-owned companies to have to buy the, uh, the percentage, like to buy the person out. So the person who is an employee who has ownership, if they leave, there’s often provision that the company has to buy out that employee, um, shares or membership interest and then they go back to the company. Well, the problem with that is that if you’re a small business owner, you may not have the capital or reserve of money to do that, to buy out the amount of ownership that you’ve given.
Atty Michael Jonas (11:36):
So that person, when they leave, if you have multiple people leave who are all employee owner and you have to pay them all out, you don’t have a lot of reserve of cash, um, that’s gonna affect the operations of your business. So that might be, um, an issue with flow. Um, employee ownership rights can vary. That’s another thing. They’re very complex, as you’ll see. Um, I’m gonna try really hard in this short amount of time, but they can become really, really difficult to communicate with people and really difficult, you know, when you hire someone, there’s already so much to do, whereas just putting money into a retirement plan, even though that’s complex as well, it may be a lot easier because there’s often, um, a company facilitating that. Um, so basically what I’m saying is there’s a lot of ownership structures that are so complex that they either take away from, you either need a specialist on your staff or you have to understand it, or you have to continually talk to financial advisor.
Atty Michael Jonas (12:38):
Um, they just may be really complex to do. And then, um, the next one is closer involved employees is good, but it could take a lot of time to build consensus or lower efficiency. Um, you know what if, because everybody’s an owner, you have to ask everybody now about more of your decision making. And because everybody’s an owner, you no longer can make all of the decisions. So it, it’s good that they’re involved, but that could be detrimental to you or what your goals are, right? Okay, so I know that’s a lot. Pros, cons.