I am currently employed by a small software company that a year and a
half ago was on the brink of going under.  With a lot of hard work and
long hours, we kept it running.  I feel I was instrumental in that
stabilization, and in the past 6 months it has started to turn around.
 I feel that I am entitled to a  piece of the company, as opposed to
another 'option'.  My question is about the wisdom of pursuing this
thought. In short:

What are the tax ramifications in becoming an owner of a company (in
the state of NJ) that you currently are employed by?  What type of tax
exposure do I have? Or can that be addressed as part of the
negotiation for partnership?  What are the risk/rewards for ownership
versus 'stock options'?  Thanks.

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Request for Question Clarification by serenata-ga on 07 Feb 2003 04:45 PST

Hi Queriousdave-ga ~

It would help to have a bit more information to answer your question.

For instance:

1. Is this company incorporated? If so, is it publicly or privately
held?
2. If incorporated, what class or classes of stock is it authorized to
issue and have been issued so far?
3. Since stockholders are the owners of a corporation (and ownership
is very evident in small, privately held corporations), what type of
'stock options' are you referring to?  "Stock options" usually refer
to the opportunity to purchase stock at better than the current market
price after certain milestones or conditions are met - is that the
option you are referring to?

With more information, our Google Answers Researchers can better
answer your questions.

Yours ever so,
Serenata

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Request for Question Clarification by richard-ga on 07 Feb 2003 05:07 PST

In addition to the items on Seranata's list, if it is a corporation it
would be useful to know whether it is a "C corporation" or an "S
corporation."

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Clarification of Question by queriousdave-ga on 07 Feb 2003 07:24 PST

Hi Serenata, 
Thanks, the questions are quite logical. I believe the company is
incorported, and privately held.  The options that I refer to are
excersisable in the event the company goes public or is sold.  As far
as I know these are the only 'stock options' that have been issued to
anyone.  It is entirely possible that other arrangements were made
with different investors/employees.  IMO, these 'stock options' carry
very little weight in terms of company direction, but will allow you
to reap a reward at some point.  Unfortunately, I can't tell you if
it's a 'c' or 's' corportation. Let me know if I need to find out.

Dave - 
my 2 cents:  If you think you're entitled to a couple of thousand
dollars or so worth of stock compensation, the info you'll get here is
probably enough to help.  BUT if you think you have a chance at
serious equity compensation from your employer you NEED to get an
attorney or CPA.

The basic rule is that when an employee gets a stock option, there are
no tax consequences until it is exercised.  On the other hand, if you
get actual STOCK from the company that employs you, it is compensation
and taxable in the year that your receive it.   This is true even if
the stock is restricted or is otherwise not tradable.

When you receive stock as an employee, you will have ordinary income
of the fair market value of the stock at the time you receive it.  So,
you would have to pay some taxes in the year you received the stock. 
When you sell or otherwise dispose of the stock, you will have a
capital gain or loss.

In addition, if the company is a S-corp, holders of the stock get a
pass-through of the corporation's profit or loss, which affects their
taxes each year.  You will have to pay taxes on your share of the
corporate profits, even if there are no cash distributions from the
company to the share holders.

Best wishes.