For the small business owner, the question of how to handle your company shares is an important one. Depending on how established your company is, how many employees you have and your ideal vision for the future of the business, you have a few different paths you may take.
Before we detail some choices below, remember you should always listen to your trusted financial advisers when making decisions about company shares, check the free resources and always comply with the SEC requirements when buying or selling shares.
If your business is in the startup phase and you need funding, one way to do this is by selling a share of your company to an investor. A small business owner has put in a huge amount of their own time and often money to get their company off the ground, so it can be tempting to keep sole ownership of your company. Unfortunately, this isn’t always possible for financial reasons- if you want the company to grow you’re probably going to need an influx of cash at some point. Furthermore, sole-ownership isn’t always the best business model.
Benefits of Selling Shares to your Small Business
- Pay off existing debts
- Further invest or put towards a charitable donation
- Cash goes back into the business, allowing it to grow and become more profitable on its own
- Sole ownership holds great risk, selling shares allows you to diversify assets
- Prepare to transfer ownership if you’re ready to move on from your company
- Bring on a new interested party who might have valuable insight into your business practises or new ideas for how to be successful
The Established Business
If you’ve made it past the startup phase and your business is creating enough revenue to support itself, its employees and remain profitable, you may choose to distribute stock for reasons other than solely generating a large cash flow. If you find yourself with shares available, here are some ideas for what you might choose to do with it.
Distribute to the ‘C Suite’
If your company has done well, you might be looking to reward some of your key personnel. Think senior executive level. We’ll look at some of the benefits of distributing company shares amongst employees, but first, it’s important to note that if you decided to divvy up stock amongst only some of your employees, you will need to cut clear, hard lines. There may be hard feelings if some personnel are included in this opportunity while others aren’t and as a business owner and the primary decision maker you’ll want to be prepared for any blowback. In this scenario, we recommend making it clear who qualified for shares and who didn’t use logical qualifiers.
Distribute to Invaluable Personnel
If you have a lot of employees who aren’t considered executive level but you consider to be invaluable to your company, you may use the distribution of shares as a way to ensure a longer-term commitment from these essential personnel. For example, if you have a member of the sales team that consistently delivers new customers, company stock might prevent him or her from accepting an offer with a competitor.
Distribute to All Personnel
This is a way to make sure that everyone is happy, which sounds great but is it right for your company? A lower-level employee might not be tempted with being gifted stock as it has immediate tax implications for that individual. A solution to this problem is to offer all personnel stock options. If you set up a plan where anyone can opt into stock at market value at a later time and/or allow the stock to gain value over time, this can be a great incentive. We like this solution because although you offer the stock to everyone on the team, not everyone will take advantage of the opportunity but no one will feel as though they’ve been excluded from the opportunity.
Benefits of Offering Shares to Personnel
We mentioned earlier that we’d take a deep dive into the benefits of offering stock to current team members rather than selling it for capital to an outside investor. Here are just some of those benefits:
- It promotes employee retention. If your young company is doing well, chances are your earliest team additions are going to start attracting the interest of comparable businesses (maybe even your biggest competitors). Stock gives these employees another reason to stay on board rather than jumping ship.
- It encourages more motivated team members. Employees who have literal stock in a company have greater metaphorical stock in the company. They know that their dedication can lead to a direct increase in the company’s (and therefore their stocks) value.
- Current employees may have the company’s best interests in mind, versus outside investors who may be interested in a bottom line.
In closing, we understand that for a small business owner to consider how to handle their company’s shares is a big decision, one that you will not take lightly. There are also benefits to sole proprietorship if that’s one of your options you might not be so quick to give up shares. Sole ownership means you are in control of your own business (something very tempting to the small business owner). It also makes your financials and your business structure more organised and simplifies your taxes.
Be sure to consider all options, weighing the needs of your business with your needs and the needs of your employees before you decide how to handle your company shares.