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F Reorganization 101: What Is It and How It Can Help Your Business

When you are establishing a business, one crucial decision you have to make is choosing what type of business it will be. You can choose a sole proprietorship, but if you have several people interested in doing business with you, you can choose business entity types such as corporations and partnerships. While doing business, you can change the type of entity as required by your business.

Making changes in your business might be caused by various things such as changes in ownership, investor demands and changes in tax laws, among others. When you change your business’s structure, the process might affect your tax obligations.

Here is what you need to know about an F Reorganization and how it can help your business.

What Is an F Reorganization

An F Reorganization is the change in a corporation’s identity, form or place of organization. This is a tax-free reorganization provided for under the Internal Revenue Code Section 368 (a) (1) (f). When you want to change your business identity, sometimes your business might have certain tax obligations that it has to fulfill before the change is affected. To ensure that businesses could change form without gaining certain tax obligations, lawmakers introduced F Reorganization to make it easier to make changes.

What Are the Requirements

F Reorganization might be a tax-free way to change your business’s identity, but there are certain requirements you must fulfill to ensure your business qualifies for a tax-free reorganization. There are six requirements any business must fulfill to qualify for a tax-free reorganization, and they are listed under the Treasury Regulations 1.368-2(m) (i) to (iv).

These requirements apply to business transactions occurring after September 12, 2015. All six requirements must be met; hence if your business only meets four or five of the requirements, it will not qualify for the tax-free reorganization. Some of the requirements include the resulting business should not have any tax attributes, an original business must liquidate its assets for federal income tax purposes, and the resulting business is the only acquiring business.

How Can It Help Your Business?

F Reorganization can help you change certain undesired attributes in your business. Suppose you started a company selling a certain product or service, and the business’s identity does not help get more customers. In that case, you need to change it to a business identity that suits your product or service.

F Reorganization is also perfect if you want to sell your business to another person or corporation. You can use the tax-free organization to make your business more desirable by removing certain attributes and adding better attributes that will convince interested buyers to make a good offer.

It can also help you get investors that are restricted from becoming shareholders in your current business. Certain people or corporations are restricted in the types of business that they can invest in. However, you can get such investors to buy an interest in your business by using the tax-free reorganization to switch to a business type they are allowed to invest in.

Changing Your Business’s Identity

Instead of starting a new business and winding up the first one, you can take advantage of the Internal Revenue Code provisions to change your business’s identity. You can change your business without paying taxes or use the tax-free reorganization to improve your operation. Ensure you follow the laws regarding tax-free reorganization correctly to avoid attracting penalties.

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