
Many small business clients find granting employees or key service providers a stake in the business an attractive concept as a tool for encouraging employee retention and quality work product. However, stock options and other grants of equity in small businesses often meet significant tax challenges that derail business owners’ good intentions.
One traditional type of equity grant, a grant of stock options, is used in many startup-friendly industries to help fledgling businesses compete with their more-established, full-pocketed competitors that offer higher salaries. But one hurdle is that stock options, when vested or when exercised, are often considered taxable income to the recipient.