How a Business Attorney Can Assist You With Type B Reorganization
Many corporations can benefit from the acquisition of other companies. However, even experienced business leaders need a legal expert on their side to help them understand the complex issues that come along with tax-free acquisitions such as type B reorganization.
What Is Type B Reorganization?
There are several methods for acquiring a business while also delaying the tax consequences of the acquisition. These are referred to as “tax-free acquisitions.” In a tax-free acquisition, the parent entity acquires the target corporation and is permitted to defer the recognition of the gain in assets. This is useful because the Internal Revenue Code allows for the parent entity to delay the payment of additional income taxes as the result of the acquisition.
Before your company can complete a tax-free acquisition (whether type A, type B, type C, or type D), the internal revenue service (IRS) will have to approve the transaction. Acquisition structures must adhere to the following before the transaction involving the acquisition of the target company can be approved:
- Continuity of business enterprise: The acquiring corporation must continue to operate the acquired entity, or, at the very least, the acquirer must use a large proportion of the newly-gained assets in some form
- Bonafide purpose: The transaction must have a genuine business purpose other than the deferral or avoidance of taxes
- Continuity of interest: The shareholders of the acquired corporation must receive a certain amount of acquirer stock. The amount must be sufficient to create a continued interest in the acquirer on the part of the target shareholders. Generally, the value of the acquirer stock transferred to the shareholders must equal at least 50% of the purchase price.
- Step-transaction doctrine: The transaction cannot be part of a larger plan that, in its entirety, would constitute a taxable acquisition.
These four conditions must be met to qualify for a tax-free reorganization treatment under the IRS Code.
Although a tax-free reorganization is not taxable at the entity level, it’s not entirely tax-free to the selling shareholders. Reorganizations are taxable to the target’s shareholders, and taxes received by target shareholders on acquirer stock are considered put off, not really avoided.
If you are interested in pursuing B reorganization for your Georgia-based business, having a reliable business law attorney on your side can make all the difference. Contact Spizzirri Law today to learn more about your options or read on for more information.
Type B Reorganization Requirements
In addition to the above requirements, there are several rules specific to type B reorganizations:
- First, the compensation paid from the acquiring corporation to the target corporation cannot be more than 20% cash. The remaining 80% of the purchase price must be paid with the exchange for voting stock of the acquirer. Only voting stock (as opposed to non-voting stock) can be used in the transaction. This applies even if the stockholders of the target corporation would prefer to be paid in cash. If the stockholders of the target corporation prefer a cash transaction, you should choose another form of tax-free acquisition.
- Second, the acquired corporation (formerly the target corporation) must operate as a subsidiary of the acquirer once the transaction is complete.
- Finally, the transaction must be approved by the board of directors of both companies. In addition, the shareholders of the acquired corporation must approve the transaction.
If other B reorganization requirements are met, in a triangular B reorganization, the stock of a parent company in control of acquiring can be transferred to the target shareholder as consideration for their transfer of target stock to acquiring.
There is quite a bit of nuance to these requirements, so we invite you to reach out to our attorneys for a free initial consultation to find out if you qualify.
What Are The Benefits of a Type B Reorganizations?
One of the primary reasons that a business enterprise chooses a B reorganization (sometimes called a “stock for stock” reorganization) is because of the tax benefits.
A type B reorganization is typically most useful when the acquiring corporation needs to retain the target corporation, which is often the case when valuable contracts would have to be terminated if the target entity were liquidated. An attorney with knowledge, experience, and a history of positive results in these complex areas of business law can help you understand what option will be most beneficial and profitable to your business.
Type A vs Type B Reorganizations
Type A reorganizations differ from type B in a number of ways. First, in a type A reorganization, the acquirer can use a wider variety of payment methods and procedures than are permitted with a B reorganization.
Type A reorganization allows the acquiring corporation to purchase the target corporation using voting stock or non-voting stock. The acquirer also has the option of using preferred stock, common stock, or securities. Type A reorganization, therefore, does not have the “voting stock requirement” associated with type B and allows for more options in selecting the type of consideration to be exchanged between the two corporations.
Type A reorganization also allows the acquirer to use a larger portion of cash in the exchange. The internal revenue code stipulates that at least 50% of the consideration be paid in stock of the acquiring corporation. Unlike type B, type A reorganization does not otherwise limit the amount of cash that may be used in the exchange.
Selecting an attorney with the knowledge and experience to understand the implications of these types of reorganizations is crucial.
Other Differences Between Type A and Type B Reorganizations
In addition to the above, type A reorganization does not require that the parent company acquire all of the assets of the target corporation. Instead, the target corporation may sell off a portion of its assets before the transaction.
Another thing to keep in mind is that when consideration other than the acquirer’s stock is used in the transaction, the transaction may be partially taxable. The target stock that is purchased using non-equity consideration is subject to capital gains tax.
What Is Different With a Type B Reorganization?
Many companies decide to acquire a target corporation using the B reorganization procedure because of the truly tax-free nature of the transaction.
Because the transaction is “stock-for-stock,” the acquiring corporation can defer payment on the gains made through acquiring the assets of the target corporation. Having an attorney with experience navigating the tax implications of these types of transactions is vital for the future of your company.
Steps to Type B Reorganization in the United States
Following the reorganization, the tax basis for the stock of the target organization must be determined. This information can be difficult and time-consuming to obtain. Many corporations use the “survey method,” which refers to surveying either a sample of the target corporation’s shareholders or, in some cases, each and every one of the target shareholders.
Determining the Tax Basis When the Target Corporation Has “Nominee Shareholders”
Determining the tax basis can be difficult when the target corporation has “nominee shareholders,” which refers to the process by which an individual lends their name for use by the real shareholder (also known as the “beneficial owner”) such that the real shareholder’s identity is kept secret. In this case, the nominee owner should be asked for the identity of the beneficial owner, his or her contact information, and the number of shares that were surrendered to the nominee shareholder.
The internal revenue code requires that the survey be completed in a timely manner, which is defined as being completed within two years of the completion of the transaction.
Having an Experienced Attorney on Your Side Makes All the Difference
The complexities of type B reorganizations mean that you need an experienced and knowledgeable attorney on your side in order to make the experience as smooth and profitable as possible. If your Georgia-based company is considering an acquisition, contact Spizzirri Law, LLC today!
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If you are spending too much of your company’s budget on legal fees, or you are just tired of the reactive approach to business law, Paul M. Spizzirri is prepared to help. Schedule a consultation to learn how my approach can produce value for your business. Call (404) 999-2161 or contact my Atlanta office online.