Employees' most frequently asked ESOP questions

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Employees’ most frequently asked Employee Share Plan questions

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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

Managing Director | Succession Plus

Craig West is a strategic accountant who has over 20 years’ experience advising business owners. His background as a CPA in public practice, provided invaluable experience in the key issues of concern to business owners. Following 6 years of study to gain two masters degrees, Craig focused on Capital Gains Tax (CGT) for business sales advising on strategic management of tax issues. This experience formed a very strong view that business owners (and often their advisers) were unprepared and unaware of the steps required to prepare a business for exit.

Craig now acts as a strategic mentor for mid-market business owners and has written four critically acclaimed books on employee incentives, succession planning, asset protection and exit strategies. Craig has conducted numerous seminars and keynote presentations throughout Australia & internationally, including adviser education programs for the Institute of Chartered Accountants and CPA Australia.