Worker-Owned Businesses: Why More Small Businesses are Converting

Some of the world’s most successful businesses are employee-owned, and worker-owned companies continue to outperform their peer companies. Yet, many business owners subscribe to some false notions of the employee-ownership model: that it will diminish their own profit or that it doesn’t apply to smaller companies.

No matter the size of your company, you can convert to a worker-owned business. It isn’t just a way to make workers happy, it’s actually part of smart small business strategies. Here’s the data on this successful and growing trend.

Benefits of Employee Ownership

If you’ve ever owned a rental property, you’ve probably observed the differences between renting and owning. Ownership means responsibility, and one who owns is much more likely to care for their personal property, whereas renters often create messes, neglect problems that end up escalating, and fail to provide care that to an owner would be considered basic. When you do find a great renter, it’s a dream! But then, when you find a great employee, it can also be magical!

Employee ownership grants your team that same level of buy-in and comes with such benefits as:

  • Attracting employees that want that level of responsibility.
  • Sometimes allowing for lower pay upfront for incredible talent, in exchange for shares or stock in ownership.
  • Providing some tax benefits, depending on how you go about it.
  • Better performance; as stated in the paragraphs above, a business with employee buy-in often outperforms the competition.
  • The possibility of retirement, since passing a company to employees can make for a smoother transition than many other forms (such as outright sale).

Employees will often get very interested in helping a business successfully convert to worker-ownership, since it means the possibility of higher wages, direct impact on the success of the business, and a say in decisions (such as selling a business). If you want to see your small business thrive, business strategies which include your employees can help you get there.

Main Types of Employee Ownership

Larger companies tend to go with the ESOP model (employee stock ownership plan), where owners essentially sell stock to employees. That model has been proven successful and has great tax benefits, but the legalities and complexities can seem a bit daunting, particularly for smaller businesses. You should consult with a business legal professional to see what applies to your business, but even smaller businesses have successfully converted to ESOP.

There are other options, however. For the smallest companies, with only a few people, a partnership is often an excellent model. A partnership allows everyone to carry the same risks and rewards, or limited partnerships can be setup, but not generally for employees (since limited partners cannot participate in the active aspects of the business).

An existing LLC can offer what’s called equity incentives, restrictive interest in the LLC. An LLC can also convert to another type of corporation, where it may be easier to offer employee shares in the company. For example, direct share options are available at any size company, and you can choose to provide those shares with certain restrictions (such as limiting the resale of those shares).

Stock options are also a way to sell to employees and create buy-in, where employees can buy stock at a set price, and for a defined number of years. Worker cooperatives (or a “co-op”) are another popular model for worker-owned business strategies. Each worker gets one vote, instead of voting being weighted by number of shares. Setting up a co-op is also a popular model because in most states it is the least expensive.

Explore Your Options

Converting your small business to worker-ownership can ensure its success now and for many years to come.