Usually if an employee gets a bargain from his or her employer, the value of that bargain has to be taxed as if the employer has paid out a bonus of the same amount. This tax advantage encourages employees to hold onto the company stock and become stockholders. Companies also receive favorable accounting treatment for this type of plan. Most companies are not required to take any charge to earnings on their income statements, even though they are selling stock to their employees for less than its market value. SWF Employees of private companies normally prefer stock options to Section 423 plans.
Options usually offer employees more flexibility as to when they purchase the stock.
Employees can just hold the option and see how the company does without having to pay out any cash. The manner in which most Section 423 plans are designed, employees purchase stock through payroll withholding every six to twelve months. Since, by definition, there is no trading market for the stock of private companies, employees with options can better avoid the risk of buying stock which they cannot sell at that time. Many employers also prefer stock options because of greater flexibility in awarding stock compensation based on an employee's performance. Section 423 plans require that all rights to purchase stock have the same terms and conditions.