In the world of corporate restructuring, tax efficiency is often at the top of every business owner's priority list. Whether you're planning for growth, succession, or a future sale, how you structure your business matters. One powerful — but often misunderstood — tool in this space is the F Reorganization.

Reorganizations are built into the tax code to help companies form and do business without incurring a taxable event.  In this article, we’ll break down what an F Reorganization is, when it’s useful, and why it might be the right move for your company.

 

What Is an F Reorganization?

An F Reorganization is a type of corporate restructuring defined under Section 368(a)(1)(F) of the Internal Revenue Code. It refers to:

“a mere change in identity, form, or place of organization of one corporation, however effected.”

In simpler terms, it allows a company to change its legal structure — like converting to a new entity, moving to another state, or preparing for a sale — without triggering a taxable event.

 

What Happens in an F Reorganization?

Below is a simplified explanation of a typical F Reorganization structure:

Explanation:

• In the "Before" state, the original corporation (OldCo) holds the operating assets.
• After the F Reorganization:
  • A NewCo is formed.
  • OldCo becomes a disregarded entity, owned by NewCo.
  • Operating assets remain in place.
  • Shareholder ownership remains unchanged.

• No change in control
• Same business continues
• Legal structure is updated without triggering tax

 

Key Features of an F Reorganization

• Tax-Free Treatment: The reorganization qualifies as tax-deferred under IRS rules.
• Continuity of Ownership: Shareholders must remain the same before and after the transaction.
• Legal & Operational Flexibility: Change your corporate form or location without starting from scratch.
• Retain EIN and Contracts: Often, the business retains its employer identification number (EIN), licenses, and key contracts.

 

Common Use Cases for an F Reorganization

Here are some typical scenarios where F Reorganizations are used:

1. Pre-Sale Planning
     Convert to an S-Corporation before a sale or prepare for a tax-advantaged asset sale.
2. Converting Entity Type
     Move from an LLC to a C-Corp (or vice versa) without losing tax benefits or investor interest.
3. Changing State of Incorporation
     Relocate your company (e.g., from California to Delaware) without restarting from scratch.
4. Internal Corporate Simplification
     Streamline a parent-subsidiary relationship by consolidating structure or setting up a holding company.

 

Why Consider an F Reorganization?

An F Reorganization can be a powerful tool in the hands of business owners and tax planners. It allows for major legal or tax planning moves — like converting to a more favorable entity type or preparing for an acquisition — without incurring an immediate tax hit.

This strategy is often used in combination with:

• Section 338(h)(10) elections
• Step-up in asset basis
• Partnership restructures
• IPO preparation

 

Caveats and Compliance Considerations

While F Reorganizations offer flexibility, the IRS requires strict adherence to these principles:

• Continuity of interest: Shareholders must not change.
• Only one operating company must result from the transaction.
• No intermediate ownership or changes in voting control.

Failing to meet these conditions could void the tax-free status — so it's essential to work with qualified tax and legal advisors.

 

Final Thoughts

An F Reorganization is one of the most effective tools for achieving tax efficiency during a corporate restructure. Whether you’re planning for a sale, expansion, investor onboarding, or just simplifying your business structure — this move can help you make those transitions smoothly.