Considering a Spin-Off?

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Many corporations operate more than a single business.  Over time, many corporations branch off into different businesses. There is no law that prohibits a corporation from operating multiple different businesses operating inside the single corporate shell.  But doing so may not be wise.


Operating multiple businesses inside a single corporate shell puts the assets of a good business at risk to pay the debts of a bad business.


If you have employees that work on only one of the businesses, and you want to give these employees compensation or incentives based on the results of operations of such business, it is somewhat easier to accomplish if the businesses are run in separate corporate shells.   Or if in the future you think you might want to bring in family members to own/operate one but not all of the businesses it is also preferable to have the businesses run in separate corporate shells.


In order to split-up a corporation into two or more separate businesses, the first step is generally to drop the assets and liabilities that comprise each business into a separate subsidiary corporation.  The second step is to distribute the stock of the subsidiary corporation to the shareholders.  This type of reorganization transaction is sometimes referred to as a Type D divisive reorganization.    In order for such a split-up to be done on a tax-free basis, certain requirements must be met.  One of these requirements is that the businesses operated by the original corporation and the new corporations must have been active businesses for at least the last 5 years.  Another requirement is that immediately after the distribution, the new corporations must be controlled by one or more of the shareholders of the original corporation.   There are other requirements that also need to be met.


Doing a tax-free split up transaction is quite complex and should not be attempted without the aid of a competent tax professional.  Please call or email me at Jsenney@pselaw.com or 937-223-1130 to discuss any questions or comments you may have concerning a tax-free split up transaction.


AND ONE MORE THING.   Non-corporate taxpayers are permitted to make an election to exclude income resulting from discharge of real property business debt and reduce the basis of depreciable real property.   The IRS recently approved a request by a 50% partner in an LLC treated as partnership to grant the partner a 45-day extension to file an amended return to make such election.   If you need assistance with filing an election to exclude discharge of debt income, or in seeking IRS approval for an extension to file such election, please call me at 937-223-1130 or Jsenney@pselaw.com.