Incentive Stock Option Plan San Diego

Incentive Stock Option Plan Summary

An incentive stock option plan offers the executives and key employees of a business a long term reason to remain employed. An incentive stock option plan offers the following advantages over a nonstatutory stock option plan:

  • Recipients are not taxed for receipt or exercise of options at fair market value; and
  • Taxed as capital gains and not income if holding period met.

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Incentive Stock Option Plan San Diego Details

Stock Option Plans Generally

In order to keep executives and key employees happy and working productively, it is often appropriate to provide these employees with an affordable equity interest in the business. A corporation may implement a stock option plan to sell unissued shares of stock to employees and directors. California Corporations Code § 408. These shares may be paid for in a lump sum, installments, or through the labor of the executive or employee. Id. However, it is illegal to advertise or hold out that stock options are to be a part of an employee compensation plan when advertising the availability of a job. California Labor Code § 407. Plans that include directors and/or officers must be in compliance with laws regulating the standards of performance by directors and the security of loans made to directors and officers. California Corporations Code §§ 309, 315.

Incentive Stock Option Plan

The terms of an incentive stock option plan must strictly adhere to statutory conditions of share quantity, employee class, pricing and transferability restrictions to qualify as an incentive stock option plan. Internal Revenue Code § 422. As an incentive stock option plan, taxation of the employee upon receipt or exercise of stock options is limited to the difference between the exercise or option price of the option and the fair market value of the option. Only when the underlying stock is sold by the employee is the employee taxed. If the holding period is met, the sale will be taxed to the employee as a capital gain; otherwise, the sale is taxed as income to the employee.

Nonstatutory Stock Option Plan

A nonstatutory stock option plan is more flexible than an incentive stock option plan, as restrictions are not placed on prices, exercise periods, or holding periods. Unlike an incentive stock option plan, where receipt or exercise of stock options is not generally a taxable event, the receipt of a nonstatutory stock option is taxed as ordinary income.

Securities Law in Stock Option Plans

Option issuances are considered securities under both federal and California laws. 15 United States Code § 77b(1); California Corporations Code § 25019. All issuances of securities must be registered, qualified, or exempted. Under federal law the exercise of an option is considered a sale, while under California securities law it is not.

Stock Option Plan Questions?

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