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Restricted Stock – What Makes It Different?

Restricted Stock – What Makes It Different?

Restricted Stock – What Makes It Different?

Restricted stock, not to be confused with restricted stock unit (RSU), is a type of stock that can be issued to any employee of the company. Restricted stock is also referred to as “letter stock” or “section 1244 stock” because of its regulations outlined by the SEC under section 1244 of the Internal Revenue Code. As its name implies, restricted stock has limitations attached to it when it is issued from the employer to the employee. Meaning, the stock is not fully transferable until certain conditions that are required have been met.

How is restricted stock taxed? Restricted stock is taxed differently than other types of stock, like Employee Stock Purchase Plans for example. One key difference is that restricted stock becomes taxable upon the completion of vesting. It must also be counted as ordinary income during the year it vests.

What limitations does restricted stock have? The most common type of limitation is the vesting period. This is the length of time before the restrictions are lifted and you can exercise the stock. You cannot sell your stock until then because the stock is not fully owned. One important piece of information to remember is that if you leave the company before the restricted stock vests, you forfeit the stock.

What are the advantages of restricted stock? Companies use restricted stock as a form of incentive for a certain performance or to reach a goal. Benefits to the employee include voting rights for the company’s decisions and that restricted stock always has value. Meaning that even if the price of the stock drops lower than when it was issued, it still some holds value.

If you have any questions regarding restricted stock or how you can use it for your business, give us a call. Stock Connections specializes in SEC compliance and regulations.

Image Credit: Tax Credits

Stock Connections specializes in working with San Francisco Bay Area companies that are involved in mergers & acquisitions, are raising capital, or creating stock option or other equity plans. We help start-up, private and public firms become – and remain – SEC-compliant. Stock Connections’ services are designed to help both start-ups and established firms comply with SEC and other regulations in their equity compensation programs. If you or anyone you know is looking to get involved with any of the above, we encourage you to contact us today!

 

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