Corporations (businesses) typically reorganize for one of two reasons: To improve efficiency or to increase revenue. “Corporate reorganization,” then, refers to any change to a company’s internal or departmental structure aimed at one or both of these objectives.
Reorganization happens, for example, when businesses need to address major problems, or when they look to overhaul strategies for management structure or market focus.
Whether it arises from new leadership or even bankruptcy, restructuring focuses largely on increased efficiency and profitability. Because it is a significant undertaking that impacts a business’s bottom line, it also requires consideration, planning, and the foresight of experienced professionals who can guide you through the process.
Corporate reorganizations can be complicated; finding legal help doesn’t have to be. Call (713) 909-7323 or contact us online to see how our team can guide and protect your organization’s restructuring.
What Is A Corporate Reorganization?
A corporate reorganization, also sometimes called corporate restructuring, is a broad term for when a company makes significant changes to its structure or operations.
There are two main reasons companies go through this process:
- Improve efficiency or profitability: This could involve streamlining operations, consolidating departments, or divesting (selling off) underperforming parts of the business.
- Change direction or respond to market shifts: The company might reorganize to enter new markets, adapt to new technologies, or pursue a different overall strategy.
There are different types of corporate reorganization, some involving legal changes with potential tax implications and some focused on internal operations.
The IRS Revenue Code (Section 368) Identifies Seven Different Types Of Corporation Reorganization.
The Internal Revenue Service (IRS) has specific rules about how corporate mergers, acquisitions, spinoffs, and other changes in structure are treated for tax purposes. Internal Revenue Code Section 368 defines seven types of reorganizations that may qualify for tax-free treatment, meaning the company and its shareholders avoid recognizing capital gains or losses on the transaction.
Here's a breakdown of the seven types of potentially tax-free reorganizations, as defined by the IRS:
- Type A: Statutory merger or consolidation. This is a classic merger where two companies combine into one new entity.
- Type B: Stock acquisition. A Type B reorganization is when one corporation acquires control of another by purchasing a majority of its voting stock. While the transaction may be made solely to acquire voting stock, it can also be one of several transactions that make up a larger plan for acquiring control. An acquisition carried out in this type of reorganization occurs in a short period of time, such as within a year.
- Type C: Asset acquisition. One corporation acquires all or substantially all of the assets of another corporation.Target corporations are required to liquidate in Type C acquisition, unless requirements are waived by the IRS. Any shareholders that have a stake in the company will also have a stake in the acquiring company. Reorganization provisions concern tax consequences, not liquidation rules.
- Type D: Transfer to a controlled corporation. Type D transfers are a form of corporate restructuring which can include corporate split-offs, spinoffs, or split-ups. If the reorganization meets all the requirements, the parent corporation and its shareholders generally won't recognize capital gains or losses on the transaction.
- Type E: Reorganization of a single corporation. This covers certain changes to a corporation's capital structure, like recapitalizations (changing debt to stock or vice versa). Recapitalization transactions involve a company’s shareholders exchanging stocks and securities for new stocks, securities, or both.
- Type F: Identity change. The IRS defines Type F reorganization as one corporation changing its identity, form, or place of organization. This reorganization typically applies when a company changes its name, the state where it does business, makes changes to its articles of incorporation (corporate charter), or other minor structural adjustments that do not involve a significant change in ownership.
- Type G: Bankruptcy reorganization. This involves transferring assets of a bankrupt company to a new corporation as part of a court-approved reorganization plan.
What Is The Difference Between Reorganization And Restructuring?
The IRS uses the term “reorganization” to refer to the seven types of transfers or transactions defined above. Generally, however, “restructuring” and “reorganization” mean the same thing, and they are often used interchangeably.
What Are The Tax Consequences Of A Corporate Reorganization?
If a transaction qualifies as a reorganization under Section 368 of the Internal Revenue Code, it is generally tax free both to the shareholders and to the corporation. However, the IRS has specific requirements that need to be met.
Here are a few key factors that influence whether a reorganization will have tax consequences:
- Continuity of Business Enterprise: The IRS generally requires a certain level of continuity in the target corporation's business post-reorganization. This ensures the transaction is a genuine restructuring and not just a sale of assets.
- Continuity of Interest: Shareholders of the target corporation should maintain a significant ownership stake in the resulting entity. This discourages using a reorganization as a way for shareholders to cash out entirely.
- Boot: If shareholders receive non-stock consideration (such as cash or other property) in the acquiring corporation, this is called "boot." Boot received might trigger taxable gains for shareholders, depending on the specific circumstances.
State and local tax laws can also apply to corporate reorganizations.
Consult with the corporate and tax attorneys at Hendershot Cowart P.C. or a tax professional for advice on your specific situation.
Internal Reorganizations
Internal reorganizations, distinct from those involving mergers, acquisitions, or spin-offs, are changes made within a company's structure or operations without significant legal or ownership alterations. These changes aim to improve efficiency, adapt to market shifts, or better align with the company's goals.
Here are some common types of internal reorganizations:
- Restructuring departments: This might involve merging departments with overlapping functions, eliminating departments that are no longer needed, or creating new departments to address emerging needs.
- Shifting responsibilities: Jobs or tasks might be redistributed across different departments or teams to optimize workflows and expertise.
- Changing reporting lines: Reporting structures can be adjusted to create clearer lines of authority, streamline decision-making, or foster better collaboration across teams.
- Centralizing or decentralizing functions: Certain functions, like marketing or human resources, might be centralized for greater consistency or decentralized to empower local teams.
- Implementing new technologies: New software or automation tools can trigger changes in how work is done and how teams interact.
- Financial restructuring: This could involve renegotiating debt, changing ownership structures, or issuing new stock.
Whether you need a lawyer for an internal reorganization depends on the complexity of the process and potential legal implications.
Scenarios in which a lawyer might be helpful:
- Significant employee impact: If the reorganization involves layoffs, changes to employee benefits, or potential for disputes over job duties or compensation, a lawyer can help ensure compliance with labor laws and employment contracts.
- Complexities around intellectual property: If the reorganization involves transferring ownership or rights to intellectual property (IP) like patents or trademarks, a lawyer can ensure proper legal documentation and protect the company's IP rights.
- Regulatory considerations: Depending on your industry or the nature of the reorganization, there might be specific regulations to consider. A lawyer can advise on any necessary compliance measures.
- Contracts and agreements: The reorganization might involve modifying existing contracts with vendors, partners, or customers. A lawyer can help review and revise these agreements as needed.
Find An Attorney With The Right Experience.
Businesses are entities prone to change, and successful businesses are those with the fluidity to adapt and address those changes effectively, and the wherewithal to seek the advice of proven attorneys in matters and transactions critical to their success.
If you have questions about corporate restructuring and reorganization and how our award-winning Houston business lawyersat Hendershot Cowart P.C. can help you, call (713) 909-7323 to request an initial consultation.
