Employers should consider all implications before transferring any ownership interest in the business to employees. Sharing ownership with your employees can create numerous new problems. These problems stem from the new relationships you would have to maintain with the new co-owners. By transferring ownership to employees, you grant new rights to the employees beyond profit sharing. Owners have rights to examine all of the business transactions. As a corporate officer, you would become a fiduciary for these new owners. A fiduciary has a legal obligation to act primarily for the benefit of the other shareholders. This means that you could be sued for various acts such as shifting corporate opportunity or running certain expenses through the corporation. Even if no litigation resulted, the new co-ownership relationship could create added difficulties that would not otherwise exist.
On top of the problems that could arise, the transfer of ownership may not have the intended result. Some employees are motivated by ownership. Others are not. It is possible that some of the employees who acquire an ownership interest will not alter their performance. If you subsequently decide that sharing ownership is not a good idea, it could be difficult to buy back the issued shares.
There are a number of other incentives that could be used to motivate employees without transferring actual ownership. These include profit sharing plans and phantom stock plans.
Tax accountant John Huddleston has a law degree and masters in tax law from the University of Washington School of Law. He has been a guest tax expert on the radio. He advises small businesses in the Seattle Bellevue Kent Everett area on various tax issues. His firm, Huddleston tax accountants, also provides tax preparation service, quickbooks consulting and general accounting and bookkeeping service.