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Running a business:
Enabling employees to participate in profits

For employees to feel fully involved with the business or for you to tie employees in to your business� future, you may need to consider some form of participation in your profits for your employees.

There are several HM Revenue & Customs approved share schemes for companies, and the two best schemes are Share Incentive Plans and Enterprise Management Incentives. These schemes have significant tax advantages.

Share incentive plans may be suitable for you if you want to give a small number of shares to all your employees (at least all those that have been with you for 18 months or longer). See the related literature for more details

Enterprise Management Incentives (EMIs) enable you to grant options to your key employees, so long as they work for the company for at least 25 hours per week (or 75% of their working time) and do not own more than 30% of the shares in the company. Your company must also satisfy certain conditions, for example it must be an independent company trading in the UK with gross assets of no more than �15m.

You do not need to use an approved scheme. You could just give your employee shares in your company, or unapproved share options, so the employee does not receive shares immediately but at some time in the future, if the employee, or the company, achieves certain performance criteria. If you are self employed you could bring your employee into your business as a partner if you are self employed. In all these cases you need to take great care and plan for all eventualities with a shareholder or partnership agreement.

You also need to consider the tax implications. If your employees receive shares they will probably liable to income tax, and the company to NIC, on their value. The shares could be �restricted shares� with complex tax planning to consider and the possibility of needing to make an election within just 14 days of the shares being received. If you bring in a partner, what about the value of goodwill or other capital assets you have just disposed of?

If you are not a company, or if EMI is not right for your business, you could implement a profit participation scheme. The amounts remain liable to income tax and NIC but a scheme can be designed as a �Phantom Share Scheme� so employees are genuinely remunerated on the basis of profits as if they were participating in company dividends, and could enjoy a share of the sale proceeds of the business if appropriately designed.