Corporate Reorganization Definition
The corporate reorganization definition is something you should know if you are planning to change the tax structure of your corporation or facing bankruptcy.3 min read
The corporate reorganization definition is something you should know if you are planning to change the tax structure of your corporation, facing bankruptcy, or preparing for a merger or acquisition. Reorganizing your corporation can be beneficial in a number of ways, from increasing profits to gaining protection in tough times. There are several different types of corporate reorganization, with varying purposes, benefits, and challenges.
What Is the Corporate Reorganization Definition?
Corporate reorganization may refer to any of the following:
- The rehabilitation of the finances of a company following a bankruptcy.
- A process that has an impact on a corporation's tax structure.
- An acquisition, merger, or sale of a company that results in a change in ownership, stock, or management or legal structure.
In the case of a bankruptcy, corporate reorganization is a court-supervised process of restructuring the finances of a company after filing bankruptcy. According to Chapter 11 of the bankruptcy code, a company will have protection against its creditors from the time it proposes a reorganization plan to time the court reviews and approves the plan.
In addition, a company can reorganize itself, including its corporate and legal structure, so that it can take advantage of current or new tax regulations. An acquisition or merger may also lead to reorganization of a company's ownership, equity structure, operations, and management. Through reorganization, the company can utilize the efficient practices or methods of the new management, capital assets, and technologies.
Corporate reorganization is an essential step for a company because it can potentially open up new opportunities, provide financial and legal protection, and increase profits and efficiencies.
What Are the Types of Corporate Reorganization?
As mentioned on the Thinking Managers website, corporate reorganization usually takes place following buyouts, takeovers, acquisitions, or other types of new ownership, or after the filing or threat of bankruptcy. According to the VC Experts website, reorganization involves significant changes in the equity base of a company, such as converting its outstanding shares to common shares or combining its outstanding shares into fewer shares, which is also known as a reverse split. Additionally, corporate reorganization often occurs when companies fail to increase their values after attempting new venture financing.
Type A: Mergers and Consolidations
Tax Almanac reported that the first recognized type of reorganization is a statutory acquisition or merger, wherein consolidations or mergers are both based on the acquisition of the assets of a company by another company.
Type B: Acquisitions — Target Corporation Subsidiaries
A Type B reorganization occurs when a corporation acquires the stock of another company, resulting in the acquired company becoming its subsidiary. It must be executed in a short timeframe, such as 12 months. Also, the acquisition must be the only one among measures that make up a larger plan for acquiring control. This type of reorganization must be performed for the sole purpose of acquiring voting stock.
Type C: Acquisitions — Target Corporation Liquidations
Unless the requirement is waived by the IRS, a targeted corporation is required to liquidate in order to be part of a Type C acquisition plan. Additionally, shareholders of the corporation will become shareholders of the acquiring company.
Type D: Transfers
A Type D transfer is categorized as either an acquisitive D reorganization or divisive D restructuring, which can be a spinoff or split-off. For instance, if Corporation A possesses former Corporation B's assets and its own assets, Corporation B will go out of business, and the shareholders of former Corporation B will control Corporation A.
Type E: Recapitalizations
In a recapitalization transaction, a corporation's shareholders exchange shares and securities for new shares, securities, or both. This move involves only one company and reconfigures the company's capital structure.
Type F: Identity Changes
According to the Internal Revenue Code, a Type F reorganization refers to a change in identity, form, or location of an organization in a corporation. Generally, rules for this type of reorganization apply to a corporation that adopts a new name, changes the state in which it conducts business, or revises its corporate charter.
Type G: Transfers
A Type G reorganization involves bankruptcy by allowing the transfer of a failing company's assets to a new corporation. The controlled corporation's stock and securities will be distributed to the former company's shareholders under the rules for distribution that apply to Type D transfers.
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