ESOP stands for Employee Stock Ownership Plan. An employee stock ownership plan gives workers ownership interest in the company. Employee Stock Ownership Plan is a benefit scheme for the employees. The company or organization gives the benefit to the employees of buying the shares after a certain period of time. An employee must provide service or work for a definite period of time before receiving the benefit of Employee Stock Ownership Plan.
There are two types of Employee Stock Ownership Plan-:
The facility of owning some shares of the company is made available only to the senior executives.
All Employee Plans
The facility of owning some shares of the company is made available to all the employees of the company
The companies offer stocks to the employees in order to attract and retain skilled and experienced talent. They offer stocks to the employees in a phased manner, which is a form of an incentive for the employees to work with the company for a longer duration. Many a times start-up companies or companies which cannot provide high salaries provide Stock Options to their employees.
The Employee Stock Ownership Plan has tax implications. It is very important to understand this before exercising the option. ESOPs are taxed at two different stages-:
While exercising – in the form of a perquisite
In this option the difference between the Fair Market Value and exercise price is taxed
While selling – in the form of capital gain.
The employee can sell the shares received however there is a certain amount of time period after which the employee can buy and then sell the shares. At the time of selling if the employee gets money higher than that of Fair Market Value then he will be liable to pay the Capital Gains Tax. The amount of Capital Gains Tax is determined on the period of holding, i.e. from the date of exercise to the date of sale.
When the employees are rewarded with stocks, they would by default give in their 100 percent of hard work and efforts as they themselves will also benefit when the prices of their company’s shares soar up. Rewarding the hard work and dedication of the employee’s work is necessary, by giving them stock would also remove the necessity of providing cash incentives to the employees at the same time giving them incentives.
Employee Stock Ownership Plan has complex rules and regulations. Companies which provide Stock Ownership benefit to the employees must have a proper administration system which works towards providing of Stock ownership to the employees. If a company does not have proper staff to look into the administration of Employee Stock Ownership Plan then it could invite certain risk issues. Upon establishing Employee Stock Ownership Plan the company must have proper administration, staff, including third party administration, legal costs, trustees. It must be aware of the costs that will include while providing this facility.
Many times under this scheme the employees invest a large part of their savings in one investment scheme, which is not advisable. Any person saving more than 10 percent of his/her salary is warned by the investors. Ideally, it is not logical to save a large amount of savings in the company’s stocks, as if at any point the company fairs poorly or runs into losses then a huge amount of savings of an employee will be lost.
An ESOP plan is one of the best ways for a startup to attract and retain talent. In order for the company to grant ESOPs to its employees, it needs to be registered as a Private Limited Company.
A startup founder has a million things on his mind. How to set up an entity and which entity to choose occupies a major part of his initial worries. Informed decisions are the best. Hence, we will tell you things about setting up a Private Limited Company. Private companies have been seen to be a preferred mode for startups, primarily due to investor confidence and the opportunity to raise equity funding. However, they have a high cost of formation and have a complex procedure for setting up. Read on to know things nobody tells you about setting up a Private Limited Company.
Following are the requirements for setting up a private limited company:-
The following steps are required to be followed while setting up a private limited company:
The Ministry of Corporate Affairs has now prescribed a default option by the name of Simplified Proforma for Incorporating Company Electronically (SPICe). A Form INC-32 is to be filed through the means of SPICe. Along with this, there is also filing of eMoA (Electronically Memorandum of Association) and eAoA (Electronically Articles of Association. These are in forms INC-33 and INC-34 respectively.
A private limited company is a preferred entity for startups as it is easier to offer equity in return for funding. A private limited company also enables the founders to issue shares to employees and ensure attractive employee benefits and hiring and retention of good talent