When business owners create a corporation, they try to anticipate for future growth. Despite those efforts, however, the corporation may need to reorganize in order to increase profits, client base, efficiency, and/or funding. The goal of reorganizing is to lay a stronger foundation for future success. Generally, reorganization only happens when businesses encounter serious issues, such as bankruptcy, or new management, especially since reorganizing can be a costly and labor-intensive. When considering reorganization, business owners have several options and must determine which one best fits the needs of the company.
Types of Reorganization
Section 368 of the IRS Revenue Code defines seven options for corporate reorganization. Depending on its immediate needs and long-term goals, the organization must determine which of the following options is best:
Type A: Mergers and Consolidations – This type of reorganization is statutory and results from one business purchasing the assets of another. One company does not become a subsidiary of the other; instead, the two combine assets and debts. When the reorganized business maintains the name of one of the combined companies, it is a merger. If two companies create a third company with a new name, it is a consolidation.
Type B: Acquisition to Subsidize – This type of reorganization results in one corporation obtaining stock from another corporation, which then becomes the subsidiary of the acquiring or parent corporation. The parent company must first gain the majority of voting shares to acquire the subsidiary, not always an easy process. After acquisition, the subsidiary continues to function under the umbrella of the parent company.
Type C: Acquisition to Liquidate – This type of reorganization results in the liquidation of the acquired company, at which point the shareholders of the acquired corporation then become shareholders of the acquiring company.
Type D: Transfers, Spinoffs, and Split-Offs – This type of reorganization encompasses transfer of assets from one corporation to another. If all of the assets of a corporation are transferred, that company then files for bankruptcy. A spin-off or split-off corporation results from a decision to transfer some but not all of one corporation’s assets to another corporation.
Type E: Recapitalization – This type of reorganization involves only one corporation and focuses on its capital structure. Stockholders exchange stocks and/or securities for new stocks and/or securities. This exchange can take the form of stock-for-stock, bonds-for bonds, or stocks-for-bonds recapitalization.
Type F: Identity Change – This type of reorganization involves a change of corporation name, a change of the state where the corporation operates, and/or a change in the original structure of the corporation as defined in its corporate charter.
Type G: Transfer of Assets – This type of reorganization involves filing bankruptcy after transferring some or all of the assets from one corporation to new corporation. Distribution of stock and securities to the company’s shareholders follows the rules outlined in Type D reorganization.
Though it may be essential to the health of the corporation, the process of corporate reorganization is not an easy one. An experienced business attorney can determine which type of reorganization will help the corporation flourish in the present and well into the future.
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