How to make an employee an entrepreneurship partner

 

By christian Gaya BUSINESS TIMES 12 APRIL 2013
When your apprentice employee has proved to be a valuable asset and you like working with him or her, as we have the same business ethics. You can make him/her your partner in your business. You can check out on how you could be more reasonable to offer a certain percent of the profits within the year and let him or her buy into the business the following year if it can be possible.

There are a number of ways to structure a partnership agreement, but first let’s think about why you would add this employee as a partner in your business rather than finding another way to reward her/him, like giving her/him stock options or establishing a profit-sharing arrangement.

Partners are typically added because they bring much-needed capital, outside connections, or new clients to a company, advantages that an apprentice may not be able to contribute. They might have strategic business experience or skills that complement the existing management team, or be positioned to someday buy the company if its owners are planning for retirement.

A full partner will get a say in your company’s future and strategy. Also, a partnership is more difficult to untangle legally than an employee relationship if things don’t work out, a legal services site for entrepreneurs. “A partner may have the right not to be removed or to require an appraisal and buyout of his or her interest”. “The paperwork for putting the employment relationship in place is much simpler, and therefore faster and cheaper” than adding a partner.

If you’re absolutely certain you want to take on a business partner and this employee is the best person to fill that role you should get a legal partnership drawn up. That may involve getting a professional valuation of your company, which can be costly. It may also require your partner to come up with cash to purchase equity, which could be a financial hardship for him or her.

If you want to give him or her an incentive to continue working with you without making her or him a full partner immediately, you could start with a profit-sharing arrangement if you have enough confidence.  Because the benefit is that no actual equity in the business is being given away. Moreover, you can structure it so that, when the employee leaves, they no longer receive a share in the company profits.

Such an arrangement would give your employee a percentage-based share of the net profit, on an operating basis and in the event the company is sold. Her or his profits bonus would be taxed as ordinary income rather than as a capital gain by the Tax Revenue Authority or simply Tanzania Revenue Authority (TRA). The drawbacks are that your employee will not get the same sense of ownership as if she bought equity in your business, and a chunk of your profits will be diverted rather than being reinvested in your company’s growth.

Another possibility is granting company stock to your employee outright or giving his or her stock options that vest over time, so he or she has an incentive to stay on. “Stock options are commonly used for large corporations as majority of business and non business people know; however, they can be equally useful for young entrepreneurship groups or small businesses as a way to compensate their employees. 

Talk to your attorney about all of these options, and their implications for your entrepreneurship company, before you make a decision about the best way to reward your valuable employee and make him or her to have last or long term ownership in your small business. As an entrepreneur you can think of these best options today