Why share your business success with your employees? Got great employees that you want to keep?
Barbara Weltman, an attorney and blogger for the SBA, reports that if you own a corporation you can reward and retain staff by using company stock rather than cash. You give up a portion of ownership but you keep control. She suggests these four ways:
1. Potential for tax-free gain. Certain C corporations, such as small tech companies, that meet the tax law definition of a qualified small business corporation (see Chapter 4 of the IRS Publication 550) can transfer shares to an employee who can get a tax break when the shares are sold in the future. As long as the stock is held for more than five years, there’s no taxable capital gain; all future appreciation will be tax-free.
2. Restricted stock. Whether or not shares don’t qualify for the exclusion, you can give stock that is subject to restrictions or forfeiture. Employees must stay with the company for a fixed number of years or satisfy other restrictions to gain full ownership. In effect, the restricted stock acts like golden handcuffs to keep key employees.
3. ESOPs. Both C and S corporations can set up a retirement-like plan funded with employer stock (see rules at www.nceo.org/articles/esop-employee-stock-ownership-plan). Owners who want to retire eventually create a ready market for their shares, employees enjoy an ownership interest in the company and the corporation can deduct contributions of shares to the plan.
4. Stock options. Grant options to buy company stock at a set price: statutory stock options, which include options granted under an employee stock option plan or incentive stock options (ISOs), and nonqualified stock options. For details see www.irs.gov/taxtopics/tc427.html.
The rules are complex, so work with a tax advisor to craft the best ownership-sharing plan for your situation. See the complete article at http://tinyurl.com/ou6mcwj.
