F Reorganization: What Is It and Why You Should Consider It?

“F-Reorganization” is one of the most popular terms in business restructuring, as it is common for an institution to change ownership and other aspects.

You may want to buy or sell a business and have bumped into the term F Reorganization but don’t know what it means. The following is what to know about the process.

What Is F Reorganization?

F Reorganization is a structural change involving S-Corporations. Section 368(a)(1)(F) of the IRS defines it as an alteration in the identity and form of an institution. It is usually tax-free and derives its name from how the business changes its “form” while maintaining the underlying elements for tax reasons. 

The most common course of action for businesses is to transfer the liabilities and assets to an SMLLC, but this has its downsides. When forming a DRE, the organization must obtain legal consent, pay taxes due to the transfer, and deal with other charges. However, F Reorganization does not run into such issues and has several advantages for the buyer and seller. 

How To Structure Mergers and Acquisitions Using F Reorganization

One of the most common F Reorganization cases is where an S-Corporation sells to another entity. Some challenges will be eminent in such a transaction in instances where both parties consider a drop-down. They will need to handle bulky legal consents, tasking elections, and face several other hurdles. 

Luckily, F Reorganization is more flexible and easier to structure, taking only a few steps. The stakeholders in the S-Corporation can form another company and conduct legitimate elections. They can also contribute their organization’s shares after selling to the novel firm and let the institution hold an election to change, forming an LLC. 

How Does F Reorganization Benefit the Seller?

If you are a seller, opting for F Reorganization gives you some advantages and flexibilities. For instance, you don’t have to obtain legal consent and transfer taxes synonymous with a drop-down and eventually form a fully-fledged subsidiary owning assets of the target organization. 

Secondly, you enjoy freedom, unlike when following the rules of Section 338(h)(10) and 336(e) elections. You can also avoid the 80% sale rule and requirements to meet the stock purchase. Also, the buyer can transact by combining cash and stock, among other benefits.

How Does F Reorganization Benefit The Buyer?

F-Reorganization also has some upsides for the buyer, not only the seller. For one, you can step up from the organization’s assets at the same amount the seller paid for LLC interest. While at it, you can also use Equity Purchase Structure, meaning you won’t need too many consents. 

Moreover, you can keep the organization’s credit history and other aspects, and it is unnecessary to terminate its election during closing. Lastly, you have less buyer’s risk, especially if there are issues with the election’s timing or legibility. 

Consider F Reorganization

Reorganization can be complex and hectic but has the perks of making your business more tax-effective. You can improve the transactions and allow investors for future expansion plans. Consulting a professional to make restructuring a breeze and to help you grow your organization and reap big from your success. 

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