California Incentive Stock Option Plan

Think Legal, P.C., provides to its clients a California incentive stock option plan that offers the executives and key employees of a business a long term reason to remain employed. An incentive stock option plan provides 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 the required holding period is met.
Another typical use of a California incentive stock option plan Think Legal, P.C., drafts provides an alternative means of compensation to employees, allowing start-ups and growing businesses to compete for the highest quality employees when conserving cash is at a premium.

Stock Options Generally

To keep executives and key employees happy and working , it is often appropriate to provide these employees with an affordable equity interest. A corporation may put in place 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 the executive or employee labor. Id. But, it is illegal to advertise or hold out that stock options are part of an employee compensation plan when announcing a job’s availability. California Labor Code § 407. Plans that include directors or officers must follow 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 a California incentive stock option plan Think Legal, P.C., provides must 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 a California incentive stock option plan, the employee’s taxation 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 employee sells the underlying stock is the employee taxed. If the holding period is met, the sale is taxed to the employee as a capital gain; otherwise, the sale is taxed as income.

Non-statutory Stock Option Plan

A nonstatutory stock option plan is more flexible than a California incentive stock option plan, as restrictions are not placed on prices, exercise periods, or holding periods. Unlike a California 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, an option’s exercise is considered a sale, while under California securities law, it is not.

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