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My S-Corp didn't have an options pool when we first set it up. I'm now thinking of creating one (15% of total) to fix that as a talent incentive mechanism. My accountant said that C-Corps have no limitations on the creation of options pools, but wasn't sure if the same freedom is extended to S-Corps too. She is researching that in the background.

So, are S-Corps allowed to have an options pool? If you've set it up, I'd really appreciate your experiences with this!

Cheers,

Sid

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From a practical standpoint the C corp is the way to go. Options might be possible in an S corp, but probably not what you want to do. – TimJ♦ Dec 29 '11 at 16:34

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IANAL / IANAA

I think you'll end up finding that you cannot do this (easily) with an S Corp.

S Corp's can have only one class of stock, and options and warrants are usually considered as a secondary or tertiary stock class in a typical C Corp.

IMO, S Corp's are fine when you have a small group of people (also, S Corps cannot have more than 100 share holders) that you just want to have basic ownership rights in the corporation with equal participation/voting rights (not meaning equal stock allocations, just that all shares have equal powers/rights proportionately).

In the typical scenario when you are issuing options to employees, you will have preferred (voting) shares and common (non-voting) shares.

S Corps also require that all shareholders be US citizens or legal aliens, not sure if that matters in your case or not.

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a) Less than 100 shareholders, all US folks - so both not an issue. b) preferred shares don't exist since no outside investors. Usually Angels or VCs demand preferred c) I'm thinking of options on the common stock. So I'd still have one class of stock. d) C-corp double taxes me, so I'd rather avoid that Appreciate the response however! – Sid Dec 30 '11 at 18:59

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