Employee share ownership in SMEs – extending benefits for start-ups to conventional firms and social enterprises

• Published in: Journal of participation and employee ownership (Online) Vol. 7; no. 2; pp. 155 - 167
• Main Authors: Suarsana, Denis, Lowitzsch, Jens
• Format: Journal Article
• Language: English
• Published: Bingley Emerald Group Publishing Limited 15.11.2024
• Subjects: Angel investors; Corporate culture; Employee involvement; Employee stock ownership plans; ESOP; Initial public offerings; Investments; Limited liability companies; Participation; Small & medium sized enterprises-SME; Social entrepreneurship; Startups; Stock options; Success; Tax incentives; Wages & salaries; United States > US; Silicon Valley-California
• DOI: 10.1108/JPEO-06-2024-0005
• ISSN: 2514-7641

PurposeAs this article reports, in recent years most legislative activities focused on start-ups, with as many as 12 European Union (EU) Member States having introduced tax incentives for employee share ownership (ESO) in this type of small and middle-sized enterprise (SME). But incentivising ESO in SMEs should be extended to all SMEs, the engine of the European economy, including those from the social economy, having shown their crucial function for the resilience of our societies during the COVID-19 pandemic.Design/methodology/approachAgainst the background of this recent and very dynamic development this article, it provides an overview of the start-up business segment in comparison to other types of companies, particularly focusing on differences with the SME sector; examines the legal regulations that hinder a broader adoption of ESO in European start-ups; presents best-practice examples to demonstrate the favourable conditions already established in some EU Member States and discussed whether these reforms and best practice examples could be extended and – as is already the case in some countries – applied to the whole SME population including social economy enterprises.FindingsSince the European Commission launched the 2011 Social Business Initiative (SBI) followed by the 2016 Start-up and Scale-up initiative, many actions to support social enterprises in view of their potential to address societal challenges and contribute to sustainable economic growth have followed. Most recently, the 2021 Social Economy Action Plan of the European Commission gave important impulses. The potential of employee buyouts offering a continuation perspective to SMEs owners looking for successors was highlighted in the 2022 EC report “Transition Pathway for Proximity and Social Economy,” calling for the implementation of Employee Stock Ownership Plans (ESOPs).Originality/valueThe situation of employee share ownership in start-ups has some parallels with that in traditional SMEs, but in many respects, they differ fundamentally. Although, on the other hand, social enterprises may also have to compete with large firms for qualified staff and face challenges when growing or scaling their activities, the reason why ESO in this enterprise segment is not widespread in the EU is altogether different. In the absence of a prescribed legal form of incorporation, social enterprises operate in various forms (be it for profit or non-profit), e.g. cooperatives, closely held limited liability companies, mutuals, associations, voluntary organisations or foundations. Therefore, this article looks into the extension of the incentives for ESO to social enterprises inasmuch as they are organised in legal forms allowing for share ownership, above all in the form of limited liability companies.