The Business Brief
Employee Incentives for Growing Businesses
The Do’s and Don’ts of Equity Plans
As an owner of a budding business, it can be hard to gain the resources needed to be successful when you're first starting. This struggle has led some entrepreneurs to venture into equity plans for their employees for compensation and incentive. Without proper research, these plans can lead to a host of issues for your business. We recently had to help two brothers navigate through one of these very situations. The brothers had bought a business together, and, as they were starting to handle the day-to-day operations, they quickly realized they needed to hire a key employee. Unfortunately, they didn't have the necessary funds to take on additional help. To combat this, they offered the employee a 5% interest in the company. After a few weeks passed, the brothers soon realized the new employee was not a great fit in the company’s culture and wanted to let the employee go. Unfortunately, because the brothers had given the employee ownership interest in the company, the entire situation was much more complicated.
Due to the employee's ownership interest, she was part-owner so the brothers could not merely dissolve the relationship. The brothers inevitably had to buy her out of her share of the company. While it was a slight financial toll on them, they were lucky to get out of the situation as quickly as they did. If the employee refused to be bought out, it would have made running the business almost impossible. brothers, they would have to rely on the former employee with 5% of the company to be the deciding vote. Also, something the brothers did not realize is that giving someone an ownership interest is a taxable transaction. If you feel you're in a similar situation — lacking funding yet in need of staff to make your business a success — know you have options. Depending on your type of entity, there are two great options. Profit Interest Equity Plans This type of plan is perfect for any start- up organized as an LLC or partnership. Instead of giving an employee the current value of the business, you're giving them a future interest in the future profits of the company. Unlike standard company stock, a profit interest is based on the future value of the company, and it is not an immediate taxable transaction. An employee is For example, if there were a disagreement between the two
compensated by receiving a percentage of the future value of the company without having to contribute any of their capital. This makes it much easier to let go of an employee if you feel they aren't a perfect fit. Additionally, since your employee will share in the appreciation of the company, it is an incentive to make the company grow. start-up organization as a corporation, partnership, or LLC. Similar to profit interest plans, the company is still providing employees the benefit of stock ownership without actual ownership responsibilities. This incentivizes your employees to help the company grow without incorporating the complexities of bringing on a new owner. There are many ways to provide employees with incentive plans without diluting your ownership shares in your company. Before you give someone stock or equity interests in your company, you should talk to an experienced business attorney. They will ensure there aren't any underlying consequences of your decision before executing it. If you have any questions, give us a call anytime at 208-401-9300 or visit our website at GenLawGroup.com. Phantom Stock/Unit Plan This type of plan is perfect for any
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