A Company share option plans, also referred to as an employee stock option is where the employees of a company have shares in the business. Employees usually receive shares via a share purchase plan. These plans can be all-or selective plans, where selective programs are often only available to senior management.
An employee stock option plan allows the employees of a company to choose the stocks of the company they want to invest in. However, it has disadvantages as well. One disadvantage of these employee stock option plans is that the employee must first wait for 90 days from the option’s exercise date before he/she can sell the option or the shares to the buyer. If the employee sells the options or the shares before the option expiration date, he/she faces a heavy tax liability. It is better not to sell during this time since the higher the price of the stock, the higher the tax liability.
Company share option plans are usually used by small businesses or start-up companies. The main reason behind this is that most companies do not generate any revenue during their early years. Thus, owners need to pay only a fraction of the total retained earnings during the initial few years of operation to cover the expenses and capital gains tax treatment. This is why most investors prefer to invest in equities for the long term.
Most business organizations have an option to sell up to 100% of the company shares on a specified date. It is often called an open market option. The purpose here is to allow the organization’s employees to decide on selling their shares at a certain date. Usually, such sales have come under the ‘cash-out option, and they take place at a strike price. The enterprise management committee determines the strike price.
One of the advantages of a company share option plan is that there is no requirement to pay tax on the sale of the shares. This applies whether or not the shares are sold during the company’s incorporation or registration. The main reason for this is that the earnings from the sale of the shares will be exempt from the payment of Capital Gains Tax. The benefits from the sale of the shares will therefore be passed on to the employees. This tax treatment is different from that of a standard savings arrangement.
Many share options can be purchased through company registration. These options include the purchase, the transfer, and the right to buy and sell the shares.
