Equity participation: What is it? Pros and cons!

What is that? Pros and cons!

The equity participation can also be referred to as corporate participation or employee participation. For this purpose, equity is invested in a company as an employee in order to be entitled to a profit share. Employees can therefore be involved in the capital of the manufacturing enterprise. Indirectly, participation works through investment companies or funds. As a rule, however, it is employee participations that are meant by the term. However, a distinction must be made between equity participation and profit sharing.

The object of a shareholding is that an employee brings money into “his” companies. This allows him, for example, to prove his loyalty to his employer or to choose to do so for other reasons. This shareholding competes with other forms of investment and is drawn from taxable remuneration.

Tax advantages in the case of a shareholding

Various equity participation models also offer tax advantages. The employer can subsidise his employees with up to 360 euros per year. This subsidy is free of tax or social security charges. The employee can count the subsidy on the remuneration paid and improve his rating. In addition to these funding opportunities, however, there are others that can be mutually beneficial.

What forms of equity participation are available?

Some forms of participation are initially less suitable than others. The range ranges from debt to equity, and the investment capital would also be a possible form.

  • Equity
  • Mezzanine capital
  • Liabilities
  • Investment capital

While equity, mezzanine capital and debt capital come from the net salaries or private assets of the employees, the investment capital consists of special grants. For example, an employee’s equity can be supplemented by employer support. In the case of investment equity investments, there is usually no additional support. In the case of equity, the shareholding continues to depend on the legal form. For example, the shares or limited liability companies offer themselves here.

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Types of equity participation

  • Share capital
  • Participation in a Limited Liability Company
  • KG Participation
  • Cooperative participation
  • Silent participation
  • Employee loans
  • Employee assets (investment capital)
  • Combinations of forms of participation

The share capital

In the case of listed companies, shareholdings are commonplace. This is where price fixing and trading takes place via the stock exchange. The shares are also managed through various depots.

But is this an advantage over non-listed companies? Not necessarily, because determining the value of the stock is not that easy. On the contrary, it is even very expensive, as is trading in the shares. These can eventually be issued in different ways. We distinguish:

  • Bearer
  • Registered shares
  • Share
  • Preferred share

In addition to calculating the dividend, ordinary shares also include a speaking and voting rights at the Annual General Meeting. Preferred shares will instead receive a dividend proposal.

What is a KG participation?

The contribution of limited partnership capital constitutes a shareholding in a kg, i.e. a limited partnership. However, this automatically makes the parties co-entrepreneurs. For the company, this means that salary payments from the company’s profits must be paid. Ergo, they can no longer be depreciated as personnel expenses.

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What is a cooperative participation?

Cooperatives can involve employees in the capital. This simplifies administration in a company. Shares may be surrendered without a certificate or certification. At the same time, all parties are given the same voting rights. For this reason, such participation is also suitable for newly established companies or cooperatives. If you want to keep employees afterwards, this type of participation is a good choice. In order to set up a company, no capital is required.

Silent participation indirectly

Indirect silent participation may be an alternative to other forms of participation. In medium-sized companies, this is even relatively common, suitable for employees at all levels. This is because this participation creates countless opportunities. However, the model is subject to conditions.

  • 5-year capital commitment period
  • Participation in profit and loss
  • Subordinatedness

Investing in a secure future

The E1 Investments concept offers a proven system for the solid development of a business as a broker and owner of a real estate business. E1 Real Estate has the infrastructure and operating systems that enable us to offer first-class services with a team of brokers. You are investing in the market of the future.

Employee loans

Maturities and interest are clearly defined in employee loans. These can of course also vary, but for employees this is a very simple and easy-to-understand form of participation. However, companies must protect their employees in the event of insolvency.

Employee credits

Employee credits are a special form of equity participation. This is not about deposits, but about reallocations from special payments. The participant receives the credit delayed. For example, the disbursements must be taxed at a later date. An advantage for the company in terms of liquidity. The employee balances are designed for a long term and offer advantages in terms of liquidity and taxes. However, there is no hedging in the event of insolvency.

Combining forms of participation

Of course, different forms of participation can also be applied in combination. Depending on the composition, however, the handling is more complicated. Whether or not such a constellation makes sense must be decided by the individual case.

Advantages and disadvantages of equity participation

Trade unions are generally not too receptive to equity participation and criticise the concept. After all, the employee assumes a double risk if the company has to go bankrupt. As a result, the employee not only loses his job, but also leaves his assets in the company. Depending on the form of the shareholding, however, there may be a hedge in the event of insolvency.

The involvement of finances is also rather counterproductive for collective bargaining. After all, this reduces the possible room for manoeuvre and also growth. Employees could continue to circumvent and oppose internal regulations.

Tried-and-tested forms of equity participation

In practice, several forms of participation have proved their worth. Various factors determine the form of participation and the extent to which they make sense for the party and the company. As a rule, it is corporations that have around 2 million employees and thus have around 12 billion investment capital. A quarter of these holdings are silent.

The first decisive factor in the form of the shareholding is the size and legal form of the company. The plans for the future of such a thing also play a role, of course. Motivated entrepreneurs will always look for a way to use capital wisely. It goes without saying that the actual economic situation of an undertaking is decisive. Legislation must be complied with in order to create a solid basis for equity participation.

Equity maturity of a company

If a healthy relationship is practised between the employer and the employee, it may be useful for the employee to participate in capital. If the company has been able to achieve good results from an economic point of view in recent years, it is called a maturity for equity investments. Entrepreneurs should obtain sufficient information on the different models before introducing them. Decision should always be taken at the respective performance level. Events, training courses and information materials can continue to prepare for such a step. Of course, it is also important to involve shareholders, management, personnel and finances in the decision. Only then can participation be on safe footing and all sides can benefit from it.

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