Charging a Fee Vs. Taking Stock in a Company for Services Rendered

When your small business provides a service or product for a company, you can accept company stock as payment instead of cash. At the time of the transaction, this can seem like a fair exchange. However, make sure you understand your company's vulnerability when you accept this kind of reimbursement. You could incur hidden costs and losses that are specific to such stock transactions.

Many start-up companies do not have the cash they need to pay for services. Your company can accept stock in such a company, and according to the Texas Lawyers' Insurance Exchange, this has been profitable in some cases. You must take into account, however, that many new businesses fail. According to the website StatisticBrain.com, 55 percent of new businesses fail in the first five years, and 71 percent of businesses fail in the first 10 years. In other words, the stock you accept as payment may become worthless.

Taking payment in the form of company stock doesn't mean your business won't pay income tax. Unless your business is organized as a limited liability company of S corporation, the business has to pay tax on the value of the stock at the time you received it. Members of an LLC or owners of an S corporatation have to pay individual income tax on stocks received from the company. In addition, if you are an independent contractor, you will have to pay self-employment tax on the stock transaction.

Accepting stock options can save your company some money. An option gives you the right to receive stock, but since you haven't received it yet, your business has no tax liability. Once you exercise the option, you must pay tax on the value of the stock as business income. One risk to this approach is that by the time you exercise the option, the stock could be worth much more than it was when the option was first offered. Had you exercised the option early, you would have paid less tax and profited from the increase in the stock price.

A contractor or service provider can negotiate for a combination of cash and stocks or stock options. This provides some immediate positive cash flow along with the possibility of prospering later from the stock. In addition, your company can ask for extra stock to compensate for taking on the risk that the stock might lose value. In other words, the cash may be all your company gets paid for the service or product he provided if the stock becomes worthless.