A corporation restructures and reorganizes in multiple ways and for several reasons. Businesses reorganize for improving the efficiency and for increasing profits. The company reorganization process addresses the component of efficiency for attempting to raise the profits of the business.
It is not something that is surprising for a company to search for the types of corporate reorganization and eventually reorganize the corporation on the spurs of changes at the top. As a matter of fact, a CEO who is newly appointed often believes that the ills of the company would be cured with the reorganization. Nonetheless, there are some companies that at times hire a new CEO just so that everything can become better with this person’s vision for reorganization.
Reasons for Reorganization
The corporate reorganization normally takes place heeding new takeovers, buyouts, acquisitions, or any other forms of new ownership. Other than this, it also occurs when there is a filing or threat of bankruptcy. As per the VC Experts website, the reorganizations of a company includes the significant alterations in the equity base of the organization, such as merging the outstanding shares of the company into fewer shares or transforming outstanding shares to common stock.
All in all, the company reorganization process takes place when a company has already attempted the new financing venture and have failed to raise the value of the company.
Types of Corporate Reorganization
Now that you have an idea regarding corporate reorganization and the company reorganization process let us talk about the types. The section 368 of the IRS Revenue Code recognizes seven types of corporate reorganizations. Starting in the reverse order, each type has been briefly explained starting from Type G to Type A:
Type G: Transfer
This type of company reorganization process takes place when your company has to file for bankruptcy. And the filing, in this case, allows the transfer of some or all of the assets of the business that is failing to another corporation (mostly a new one). And then the stocks and the security would be distributed to the shareholders of the organization that has procured your company’s assets.
Type F: Identity Change
The identity change is known as the Type F out of the types of corporate reorganization process as per the IRS. As defined in the IRC (Internal Revenue Code), this plan is “a minor alteration in place, form or identity of the organization of one company, however it has been affected.”
In short, it is a company reorganization process that includes the alterations of a company’s name or if the company is moving to another state. The rules also apply to the company that makes any modifications in the corporate charter of the business. However, in this case, there would be a transfer from the prior corporation to the new business.
Type E: Recapitalization
This is another one of the types of corporate reorganization that includes the exchanges of securities and stocks for new securities, stocks or even both by a shareholder of a corporation.
In short, this change takes place between two shareholders in one company. The viable situations here include a stocks-for-bonds transaction, a bonds-for-bonds move, and stock-for-stock recapitalization plan.
Type D: Transfer
This type of transfers falls under the divisive D restructurings or acquisitive D reorganizations. Moreover, this includes the split-offs and the spin-offs. Let us take for instance: in case, corp 1 has the assets of both the corp 1 and corp 2, which is the former corp. And if corp 2 goes out of business, the prior shareholders of the corp 2 control corp 1.
Type C: Acquisition — Target Corporation Liquidation
This is also one of the types of corporate reorganization where the company has to be liquefied. And unless the IRS raises an obligation, the targeted corporation would have to liquidate as per the Type C acquisition plan. In this process, the target-corporation shareholders become the company’s shareholders that are being acquired.
In the end, any shareholders who have a stake in the business would eventually own a stake in the other acquired company. The reorganization provisions dictate tax outcomes, not liquidation rules included in Tax Code Sections 336 and 337.
Type B: Acquisition — Target Corporation Subsidiary
In this company reorganization process, another company acquired the stocks of your company. Another thing about this process is that it has to be completed within one year from when the procedure begins. This acquisition has to be merely one in a series of transits involving a broader purpose of obtaining authority.
Type A: Consolidations and Mergers
The first recognized company reorganization process is the statutory merger or acquisition that is entirely based on one company buying the assets of another organization.
Understand the Future & Plan Accordingly
Now that you are aware of the types of corporate reorganization, it can easily help your organization at any time when there is trouble or some uncertainty regarding the future. To know about each type of company reorganization process in details, check out the government website at – https://www.law.cornell.edu/uscode/text/26/368
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