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Employees’ most frequently asked Employee Share Plan questions


Employees’ most frequently asked Employee Share Plan questions

By , May 20, 2019
employee share ownership plans

With a resoundingly positive impact on business performance and overall value, Employee Share Plans are an attractive and highly effective option for business owners planning their succession. Embarking on an ESOP is a milestone for your business and the staff involved and of course, they’ll have questions they want to ask. Here are some of the more common ones;

1. Does being a member of an employee share plan affect the terms of my employment?

NO. The share plan rules and qualifying conditions etc., relate only to the employee share scheme plan and does not have any effect on the laws which govern your employment including any enterprise bargaining agreement, award or another arrangement.

2. Am I now a director of the company or entitled to a seat on the board?

The employee share plan does not include any right to become a director of the company and in fact, most employees do not want to become directors as this may well make them liable for other areas. Typically, when a share plan becomes a majority owner in the company, an employee may be elected to join the board of directors. This, however, is a matter for agreement between the employees and the current directors/founders of the company.

3. What is my risk? What if the company owes money?

Employees who are members of an employee share plan are protected from any of the liabilities of the employer company and would not be liable for any debts or monies owed – nor are they required to contribute to any losses incurred by the company.

4. What happens if I leave the company?

Except in very specific and unusual circumstances, leaving employment would remove employee share plan entitlements meaning you no longer qualify for the shares or options as you are no longer an employee. In many cases disqualifying events are also accompanied by disqualifying discount and so the value of your shares or options may be reduced, especially if you ‘leave early’.

5. What happens if the company is sold?

In the event that the company is sold externally there are two possibilities:
i. Members of the employee share plan are ‘forced’ to sell at the same time as the founders and would, therefore, be paid out the value of their shares at the time of the sale.
ii. The buyer decides to keep the employee share plan in place and continues to make contributions etc. in the same way that the original owners did.

6. What information will I receive on the performance of the company?

Employee share scheme members will always receive an annual statement which shows the number of units they hold and the underlying value of the shares in the company. The plan administrators will need to complete an annual valuation of the business as part of this process and that will always include a review of financial statements. Most employers provide a summarised version of this information to ESOP members.

7. Can I own the shares in a family trust or my self-managed super fund?

The PPT allows you to own shares through an ‘associate’. This could be a family trust (and this is probably a good idea for asset protection) and has some tax benefits as well. We would not normally recommend that employees use an SMSF as the rules around investments are quite strict and a breach of the SIS Act has quite serious consequences.

8. If the share plan earns dividends from my employer, do these come to me and if so, do I pay tax on them?

YES. In all of the various structures, the employee share plan would normally act as a ‘flow-through’ device and in the case of the truss structure that is commonly used, any given or distributions we see need to be passed through to the individual employees. At that point, they would be taxed as part of the employees’ individual income at marginal tax rates and in many cases dividends would include franking credits and these also are through to the employee.

Craig West

Craig West

Executive Chairman | Succession Plus

Craig West is a strategic accountant with over 20 years of experience advising business owners. His background as a CPA in public practice has provided invaluable experience in the key issues of concern to business owners.

In March 2014, Craig was appointed Executive Chairman of the SME Association of Australia, Australia’s largest small business organisation representing over 300,000 business owners.

In October 2014, he was awarded the Exit Planner of the Year at the Exit Planning Institute Annual Conference in Texas, USA, due to his innovative development of an exit planning process to help business owners maximise business value and achieve a successful exit.

Craig’s proprietary structure - a Peak Performance Trust - has won the Australia-wide award for the Employee Share Ownership Plan of the year twice in four years.

In November 2018, Craig launched SME Experts in partnership with Mark Bouris’ Mentored on Podcast One and quickly grew the monthly podcast audience to over 26,500 downloads; in October 2019, he released a new podcast focused on medium-sized businesses - Mid-Market Matters.

In July 2021, Craig joined the NSW Committee for STEP (Society of Trust & Estate Practitioners) – focusing on advising families across generations.

Craig has also launched a SaaS platform, Capitaliz (which captures the 21-step process), to assist other advisers internationally deliver advisory services at scale.

In November 2021, Craig was appointed Executive Chairman of NSW Leaders, a business mentoring group for leading NSW businesses.

In July 2022, Craig West received the award of Doctor of Business Administration for his research thesis titled “Examination of the key factors driving business exit options in Australian Small and Medium Enterprises.”

Craig is passionate about encouraging business owners to think strategically, maximise the value of their business and achieve a successful exit.

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