Corporate Reorganization: Everything You Need to Know
Corporate reorganization involves restructuring the way a company works in an attempt to avoid double taxation scenarios, improve profitability.3 min read
Corporate reorganization involves restructuring the way a company works in an attempt to avoid double taxation scenarios, improve profitability, or increase the company's efficiency.
A C-corporation's income is taxed on two separate levels:
- The corporate level
- The shareholder level
The first level of taxation happens at the corporate level. Once the corporation's earnings have been distributed to shareholders in the form of dividends, the shareholders will then be taxed as well. In addition, corporate assets that have appreciated are usually subject to taxation at the corporate level if they have been distributed to shareholders. This results in the same type of corporate taxation that would happen if the assets in question were sold off by the company and the profit from the sale was distributed to shareholders.
Also, if a company's stock is sold, the shareholders selling that stock are taxed on any financial gains they experience from that sale. The shareholder that acquires the stock being sold holds it on the basis of its purchase price. However, the assets existing inside the acquired company do not change to properly reflect the purchase price of the stock unless the decision is made to pay the corporate tax on any financial gains associated with the sale on an inside basis.
Types of Corporate Reorganization
A corporation may choose to restructure or reorganize for a number of reasons, not the least of which is to avoid the double taxation that is common in certain business structures. Other reasons might include increasing profits or improving the efficiency of the company. Normally, when a company reorganizes, it will aim to address issues related to efficiency as a way to improve generated profits.
It is not unusual for a company to reorganize when there have been significant top-level changes to the company's leadership. New CEOs, for example, often see reorganizing a company as a way to fix some of the problems the business was experiencing. In fact, many companies will choose to hire new leadership based solely on a candidate's vision for reorganizing the company. Other common triggers for corporate reorganization can include:
- A new acquisition
- A corporate buyout
- Corporate takeovers
- New management
Corporate reorganization usually involves significant changes to a company's equity base, such as:
- Conversion of outstanding shares to common stock
- Reverse splits
- The combination of the company's shares that are outstanding to reduce the number of available shares
A corporate reorganization normally happens after a company has already tried doing things like obtaining new venture capital but has failed in their attempts to increase the value of the company. Corporate reorganizations can take a number of different forms, including:
- Consolidations and mergers
- Acquisitions with the intent of subsidizing the target company
- Acquisitions with the intent to liquidate the target company
- Identity changes
The specific type of reorganization a company will choose largely depends on the end goal it wishes to achieve.
Things to Consider Regarding Corporate Reorganization
A new CEO often feels there is good reason to reorganize a company when they come on board. Almost half of all new CEOs, in fact, launch a reorganization of some kind within the first two years of starting with a company. Even this rapid timeline seems to be shortening, though, with companies like Caterpillar, Hewlett-Packard, and Nokia announcing complete overhauls to the way their companies are structured. This sudden spike in the ambitious aims of companies to reorganize is no doubt a direct reflection of the current economic cycle.
Many companies are just now beginning to recover from the recent economic crisis, with complete recovery still seeming out of reach for many unless drastic steps are taken. Making changes to a company's business structure tends to look like a good way to shake things up and encourage better overall performance across the company. It is worth noting, however, that a corporate reorganization can be a big risk in terms of time, energy, and resource investments. While they may seem like a good idea at first, many corporate reorganizations don't do much to improve things when everything is said and done.
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