EMI Share Options for small businesses

Paula Tomlinson talks about EMI share options

EMI share options – guest post by Paula Tomlinson. This article follows on from my post about options vs shares.

If you’re looking for a general guide to giving away shares in your business, you might want to read this article first.


What are EMI share options?

EMI share options are a simple way to create a share option scheme in your company. It’s simpler than the kind of share option scheme big companies use, but still has tax advantages for employees. EMI stands for Enterprise Management Incentive.

Here’s how you might use the EMI share options plan in practice for a small business.

When you want to introduce a new senior executive or director to your company

When you want to bring in a senior member of staff, or another director, they might want to get some shares in the company too. You want to provide an incentive arrangement above and beyond a normal bonus scheme, maybe something more long term. Usually, you’re bringing this person on board to help you improve the value of your company.

The EMI share options scheme can be used to give shares to this new person in a tax-efficient way.

And you prefer to keep the shares – at least for the time being until the new person has proved themselves?

You might own 100% of your company and you quite like being able to take all the dividends that the company can afford for the next year or so. You might also want to make sure the money your new director makes is not reduced by any more tax than it needs to be. The EMI share options scheme has the added advantage of additional corporation tax relief for your company.

These requirements can be met by offering tax approved EMI share options. Once we talk about share options, we think of the usually complicated arrangements that large companies offer. It is therefore tempting, instead, to offer shares to the new person.

This might work very well for some, but in my experience, it is too soon to let the new person benefit from dividends. They are new to you and you should be cautious. They might have to pay something for shares. Or they may prefer an option so they aren’t out of pocket to start with.

Can’t I issue a new class of shares instead?

Yes, a new class of shares with no dividend or voting rights and little value can be used. However, these can be seen as a poor second cousin to the main shares as it becomes apparent that even if the company does well these shares don’t increase in value much.

The EMI share options scheme can look more attractive to a new senior employee, especially if they’re quite experienced and know the difference between A and B classes of shares.

Why wouldn’t I offer share options?

You might want or need some cash to be invested in your company to help with its growth plans. This might be a good source of cash for you. If you operate a low salary, high dividend arrangement for yourself with its national insurance savings you might want to do the same for your new director.

But the new person often needs some certainty of income through a salary, because they still have a mortgage to pay.

EMI share options paperwork.

You have to tell HMRC you’ve used the EMI share options within three months, and inform them in July every year. You must have some clear written rules to include things like, the options have a 10-year life and if the director leaves the options will disappear. Your accountant should check that the best tax treatment continues to apply.

If your business is property development, nursing homes, hotels, farming or leasing, you cannot use the EMI share options scheme.

With shares, you need a shareholders’ agreement and possibly a share buyback arrangement.

With a regular share option scheme, there’s a lot more in the way of paperwork, and legal set up than the EMI share options. That’s why Paula favours it for her clients.

The EMI share options are designed for small businesses. Nothing to do with music.

If you’d like to talk to Paula more about all the technical details of the EMI share options, then I’d recommend giving her a ring on 01444 882677.

Other great tips on share options and giving shares to key employees

You might want to also read these articles about shares and equity:

Main resource – how to give shares in your business

Giving shares and equity away

What are growth shares?

Getting investment into your business

The advantages and disadvantages of a share issue

The difference between share options and shares for small businesses

The big danger in chasing investment

How to get some help with thinking through share options

And if you want some help about the strategic implications of bringing in someone else to the business, giving them shares, or how to recruit the right second in command, you might want one of my strategy sessions.

If you are looking for more on-going support to grow your business, make the right decisions and work with your peers, my Remarkable Business Programme might be right for you.

Find out more

Photo credit – Sliced blancmange by fedcomite, from Flickr on a creative commons licence