Profit-Sharing Cited as Key to Retaining Employees, Experts Offer

Profit-Sharing Cited as Key to Retaining Employees, Experts Offer

Kitchen and bath dealers who want to attract and keep the best employees and who want to motivate them to help the dealership become more profitable may want to consider establishing a profit-sharing or employee stock ownership (ESOP) plan.

You may share ownership with your employees for a variety of reasons. For some people, the reason may be simply "it's the right thing to do." For most others, however, there are purely practical reasons to share ownership. Employee ownership can have benefits for owners of businesses, employees and their companies. Among those benefits are:

• Attracting and retaining good employees. Many small businesses have trouble attracting and retaining good employees. Using employee ownership as an employee benefit can be an important way to address this problem.
   
• Buying out an owner. In almost every small business, the owner or owners will eventually want to leave. Often, no family member or colleague can take over and there are no buyers willing and able to buy the business at a reasonable price. Selling the business to employees can be a way out of this dilemma.
   
• Sharing entrepreneurship. Starting or running a small business is difficult. Many people find that sharing the risks and responsibilities of ownership with others lessens these burdens.
   
• Raising capital. Employee ownership can help provide additional capital. Employee owners may be willing to contribute to the company by buying shares or taking lower wages in return for stock. Employees with no stake in the business see little need to pitch in.
   
• Helping the business to perform better. Many studies demonstrate that employee-owned firms perform substantially better, on average, than non-employee owned firms. This is especially true when employee-owners can participate in decisions affecting their work.
   
• Taking tax benefits. Certain employee ownership structures qualify for tax benefits.

There are several types of profit-sharing or ESOP plans to consider.

Profit-sharing plans provide for the participation in company profits by your employees or their beneficiaries. Company contributions may be determined either by fixed formula or at the discretion of your board of directors.

In a cash profit-sharing plan, profits are paid directly to employees in cash, check or stock as soon as profits are determined. (This type of profit-sharing plan is not a qualified retirement plan.)

A deferred profit-sharing plan is designed to provide benefits to participants upon retirement. Benefits at retirement are based strictly upon the sum total of the contributions made and the result of investments. This plan must provide a definite pre-determined formula for allocating contributions made to the plan participants.

With a profit-sharing plan, your company must place the assets in a trust, which must be administered by an independent trustee.

Profit-sharing has major tax advantages for both your company and your employees. The contributions your company makes to the plan are immediately tax-deductible, and your employees pay taxes only when they cash out.

An employee stock ownership plan (ESOP) is a type of tax-qualified employee benefit plan in which most or all of the assets are invested in stock of the employer. Employees do not actually buy shares in an ESOP. Instead, the company contributes its own shares to the plan, contributes cash to buy its own stock (often from an existing owner), or, most commonly, has the plan borrow money to buy stock, with the company repaying the loan.

All of these uses have significant tax benefits for the company, the employees and the sellers. Employees gradually vest in their accounts and receive their benefits when they leave the company (although there may be distributions prior to that).

Like profit-sharing and 401(k) plans, which are governed by many of the same laws, an ESOP generally must include at least all full-time employees meeting certain age and service requirements.