Selling a Business

F-reorganisations Before a Sale

Understand the pre-sale restructuring that has become the default for S corporation exits: what it does, why it removes the election risk, how it makes rollover possible, and why it has to be done before a letter of intent rather than after.

  • Expert
  • 9 min total
  • 12 chapters

What decision this helps you make: Whether to reorganise your S corporation into a holding company structure before going to market, and how far ahead of the process to do it.

What this topic is

A reorganisation under IRC §368(a)(1)(F), a mere change in identity, form, or place of organisation of one corporation. In the pre-sale context it typically means shareholders contribute their S corporation stock to a newly formed holding company that elects S status, the operating corporation becomes a qualified subchapter S subsidiary, and that subsidiary then converts to a single-member limited liability company. The buyer subsequently purchases membership interests, which is an equity purchase legally and an asset purchase for tax.

Why it matters

It delivers what both sides want simultaneously: legal continuity of contracts, licences, and the employer identification number for the buyer's operational purposes, asset-sale tax treatment producing amortisable basis, a structure that accommodates rollover equity without breaking S corporation shareholder rules, and no dependence on a purchasing corporation. It also removes the transaction from hostage to a decades-old S election that may or may not have been valid.

Who should learn it

Owners of S corporations planning a sale, and advisers deciding between an election, an asset sale, and a pre-sale reorganisation.

What you will understand

  • The mechanics of the standard pre-sale F reorganisation and the order the steps must follow
  • Why it produces asset-sale treatment for the buyer without a §338(h)(10) election
  • How it solves the rollover problem that S corporation shareholder rules otherwise create
  • What it costs, how long it takes, and the specific ways it goes wrong

Prerequisites

Common misconception

"We can do the F reorganisation once we have a buyer." You can, and doing it under time pressure inside exclusivity is how it gets done badly. State filings, entity formations, elections with deadlines, bank and licence notifications, and contract assignments all take time, and a reorganisation that is rushed or executed out of order can fail to qualify, which is a considerably worse outcome than not having done it. The right time is months before a process, not weeks into one.