Corporate reorganization allows businesses to change hands, branch out, or do what’s needed to keep the company going.
It’s especially helpful if the company is having financial difficulties.
The article also explores what goes into an excellent corporate reorganization plan and the accompanying tax consequences.
If you have questions, please contact us today.
What Is Corporate Reorganization?
How would you describe a corporate reorganization? In simple terms, corporate reorganization is a way for businesses to restructure their companies.
It’s also an avenue that companies use to pause foreclosure proceedings.
Because reorganization can be costly, it’s an option that companies use if the benefits outweigh the money they will consume to go through with it.
A famous example of corporate reorganization involved Krispy Kreme Doughnuts.
Krispy Kreme filed for Chapter 11 bankruptcy shortly after going public in 2000.
A series of reorganizations saved the company from oblivion, boosting it enough for Krispy Kreme to file to go public again in 2021.
What Are the Different Types of Corporate Reorganization?
Corporate reorganization gets its name from the federal tax code from where it originates. The regulation provides a couple of different ways for businesses to reorganize.
Let’s go over the different types of reorganization now.
Statutory Mergers and Consolidation
In a merger, one company buys the other company. There are different ways to do this, with varying outcomes regarding what company survives.
Depending on the type of merger, the companies may use a vehicle to effect the merger. A primary reason for this is to save money on taxes and other costs.
Consolidations, in contrast, are where multiple companies combine forces.
After the transaction, the companies may still exist but operate under the umbrella of the purchasing company.
Another category of corporate reorganization is “acquisition.”
The first type of acquisition is one that solely involves a stock exchange. The purchasing company acquires voting stock and controls the other company after the transaction.
In exchange, the purchasing company hands over some or all the stock in its company.
The second type of acquisition is where companies exchange stock and property. The purchasing company acquires almost all the purchased company’s property.
In return, the purchased company receives some or all the purchasing company’s voting stock.
Two broad types of transfers qualify as a corporate reorganization under the federal tax code.
The first is a transfer of some or all of one company’s assets to another company.
The company receiving the transferred assets or stock must be in control after the transfer is complete.
If one or more shareholders control the transferred company after the transaction, that also qualifies. The transaction needs to be of a particular type to qualify.
The second type of transfer occurs as part of a Chapter 11 bankruptcy proceeding.
For this transfer, it also needs to be part of a qualifying transaction.
Changes in place of organization, form, or identity also fall under the umbrella of corporate reorganization.
This type of change may sound straightforward, but it’s deceptively complex.
In fact, many things need to line up for these changes to qualify as tax-free under the tax code.
Lastly, recapitalization is another qualifying type of tax-free reorganization.
Recapitalization is the process of converting or restructuring the company’s debt and equity.
Corporate Reorganization Checklist
There’s no one-size-fits-all approach to anything, especially business. But there are steps that companies can take to help effect a smooth corporate reorganization process.
Talk to an Experienced Business Attorney
There’s a time and place when business owners can try to “tough it out” and go it alone. But planning and carrying out a corporate reorganization is not one of them.
When done right, reorganization can save your company or allow it to evolve. When done wrong, it can spell disaster.
If a company doesn’t follow the necessary steps when reorganizing, fines, penalties, and hefty tax bills may be on the horizon.
This is especially problematic for a business using reorganization to save it from financial ruin.
Do it right the first time and involve a corporate reorganization attorney with a proven track record.
Draft a Solid Corporate Reorganization Plan
The corporate reorganization plan should describe things like:
- The basis for the reorganization,
- What will happen pre- and post-organization, and
- Any other vital matters that companies must or should disclose.
Having an experienced attorney is critical here.
Financial headaches may occur if the company cuts corners or doesn’t follow the proper procedure.
Get the Necessary Permissions
It’s essential to ensure you have in place all the votes and consents that need to happen.
This is true regardless of the type of corporate reorganization plan the business carries out.
The last thing businesses want is for the shareholders of either company to file a lawsuit against it for not doing something right.
What Are the Corporate Reorganization Tax Consequences?
The tax consequences of a corporate reorganization depend on what the company does and whether it did it right.
Reorganization should be tax-free under federal law if the company follows the proper procedures.
That’s why it’s a powerful tool for businesses, especially those looking to improve their financial situation.
That’s also why it’s crucial to involve a business attorney in the process.
Massingill —Skillful and Efficient Corporate Reorganization Attorneys
Massingill helps business owners protect their investments by providing streamlined and personal solutions at an affordable price.
The firm’s business lawyers routinely handle seven- and eight-figure corporate transactions.
Clients praise the firm for its ability to effectively and efficiently handle a wide range of business matters.