Should I offer ownership to my key employees?

One of the most difficult parts of owning a business is finding great employees. Successful business owners know they cannot be everywhere at once and therefore must rely on their key employees. Sometimes retaining key employees becomes vital not only for day-to-day operations but also for the future success of the business.

This drives many Wisconsin business owners to ask: Should I let my key employees buy into my business? This is a loaded question. Not only do business owners need to assess whether the individual is a true “partner” and someone to help with all matters big and small, but they also need to examine whether it makes sense from a legal and practical standpoint.

This article discusses some of the issues you will need to understand if you are considering offering a valued employee a piece of your business.

Buying in

First, consider how the ownership will be transferred. Sometimes ownership can be transferred in consideration of past services as an employee. Most often employees pay for their ownership in cash or through delivery of a promissory note. How the ownership is purchased will also determine what taxes the transfer will be subject to. You may also want to consider whether an 83(b) election is appropriate. Always consult your accountant or tax professional about what the best sale structure is from a tax perspective.