If you would like to give your employees the chance to own shares in your company, a flowering share plan might be the ideal option. These are highly flexible schemes that are based on future growth, so can be beneficial. From the employee’s perspective, flowering shares are a cheap way of acquiring shares in the company plus the schemes are tax efficient.
Often, flowering share schemes are used in start-up companies as a way of incentivising employees and letting them benefit from the substantial growth that start-ups sometimes achieve. This particularly applies when the start-up is acquired by a larger company.
They are not reserved for start-up companies, however, and your company may be able to benefit regardless of its position.
What Are Flowering Share Plans and How Do They Work
One of the key aspects of a flowering share plan is it does not require review or authorisation from the Revenue. This reduces the complexity, time, and expense of setting them up.
They allow employees to acquire low value shares in your company. Often, this low value is a nominal amount although the amount to charge is at your discretion as the employer. This is called the day one value.
Flowering shares are ordinary shares and employees of the company can own an unlimited amount. Owners of the shares can sell them for profit at a later date, although this is dependent on the future growth of the company. In addition, the value of flowering shares must reach a hurdle before the owners can sell them for profit. The hurdle is a pre-agreed amount above the day one value of the shares.
The value of the shares once the hurdle is passed can be a fixed amount or it can be variable depending on how much the company’s value has increased.
As well as the above, you have additional options when setting up a flowering share plan. For example, you can structure the plan so that reaching the hurdle is the only way flowering shares can have any tangible value. In addition, the scheme can be set up so the holders of flowering shares do not receive dividends or voting rights.
There is also the option for you to deal with employees who leave the company. Employees who leave on bad terms, for example, can be excluded so they don’t receive any further benefit from the flowering share scheme or the company’s future performance.
When an employee sells their flowering shares, they are liable to capital gains tax (CGT) on the profits they make.
Benefits of Flowering Share Schemes
- Gives employees a low-cost way of investing in your company.
- Helps you retain staff as it gives employees a bigger financial stake in the company’s success.
- Often, the CGT rate your employees must pay on profits from the sale of their flowering shares is lower than if they had to pay income tax on this profit.
- Owning flowering shares provides additional motivation for the employee to perform and deliver.
- There is normally no PRSI to pay when an employee takes profit from flowering shares. This is providing the price the employee paid for the shares was higher than the tax market value.
Flowering share plans give you and your employees an option for owning shares in your company with the shares being directly linked to future growth.
To find out more about setting up a flowering share scheme or anything else to do with your business, please contact a member of the Gilroy Gannon team today.