What is Sweat Equity?

Joint stock companies, democratic management and decentralization of authority and responsibility have made a considerable number of business ventures into what is known as a 'people's, employees and team's business'.

In short, modern business cannot be made successful by a single person. A large coordinated and dedicated team effort is required. Sweat equity is basically a reward for such an effort that is contributed to the growth and development of a company or project. The non-monetary nature of contribution, in terms of efforts has earned it the title, sweat equity.

Its definition can be technically stated as rewards that is granted by the company to its employees, as an appreciation of the hard work, put in for the growth and development of the company. The company issues such shares to its employees without application, and call it as a bonus or employee incentives.

The meaning of the words, sweat equity issued without application or call money, means that these sweat equity shares would be fully paid up, and the employee would not owe anything to the company's stock as a capital. With effect these shares would prove to be assets, which can be sold off at a high market value through a stock exchange. The second option that an employee can use is to stay with the sweat equity shares, and enjoy the annual premium that is paid by the company.

In some cases, an option for sweat equity is also offered wherein, a date is fixed on which the employee can either get the sweat equity shares, or can choose to get a monetary payment of an amount that is worth the market value of share.

Issuance of sweat equity is prevalent throughout the world. The only condition is that the company should be a publicly traded incorporated company, and should meet the minimal authorized capital requisites. Some companies which are not traded publicly can also offer such shares to its employees. The advantage of issuing these shares is that it propagates a certain feeling of integrity throughout an organization.

The psychological effect of issuing such an equity is that the employees get a feeling of ones and unity, plus there is also a development of certain employee motivation that gets imbibed in all the employees. There are certain fiscal advantages, for example, loans can be secured with the help of these shares. Apart from that, if a person chooses to retain the equity, then he has a regular annual income in the form of dividend (return on investment) that is paid by the company.

There are however some tax implications and in certain cases, liabilities. For example, the dividend that is received by the employee on an annual basis goes into the taxation bracket as it is considered to be an income. Secondly, in some cases, the IRS also considers the issuance of bonus shares as an income of the employee. The state and federal laws however differ throughout United States. The sale value of the shares would also be added into the income of the employee.

Overall sweat equity as incentives for employees, is a good option that can be utilized by the companies to show their appreciation towards the employees.