Before many privately held companies are sold, the seller's side goes through a short sequence of legal and tax paperwork changes — often called an "F Reorganization." This is a plain-language walkthrough of what that process is, why it happens, and what each step actually does. It uses a generic company as an example; none of the steps below change what the owners own, what the business does, or who runs it — they only change the legal wrapper around the business so a sale can close cleanly.

Terms worth knowing first

F Reorganization

The restructuring itself

A restructuring the tax code specifically allows to happen without a tax bill, because the resulting company is treated as a continuation of the old one — not a new taxpayer.

S corporation

How the company is taxed

A company that doesn't pay federal income tax itself — its profit passes through and is taxed on the shareholders' own returns instead. Keeping that status intact avoids an extra layer of tax.

QSub election

Paperwork that tells the IRS how to treat an entity

A one-page IRS form (Form 8869) that tells the IRS to treat a subsidiary company as invisible for tax purposes, even though it still legally exists.

Statutory conversion

Changing legal form, not the business

A state filing that changes a corporation into an LLC (or the reverse) without dissolving it or restarting the business — the same company, in a new legal form.

Disregarded entity

An LLC the IRS treats as invisible

A single-owner LLC the IRS ignores as a separate taxpayer; its income is reported directly on its owner's tax return, as if the owner held the business directly.

Rollover

How sellers are often paid at closing

The part of a payout received as ownership units in the buyer's company instead of cash, giving the seller a continuing stake in the business going forward.

Purchased interests

The other part of the payout

The part of the seller's LLC ownership sold to the buyer for cash at closing. Together with the rollover portion, it adds up to 100% of the ownership.

Holdback

Money that arrives later

A portion of the purchase price withheld at closing and paid out later, once the final numbers are confirmed.

Timeline — Filing to Conversion to Closing

DAY 0 Stock contributed Owners swap stock for stock of a new company SAME DAY, RIGHT AFTER (WITH STEP 1, THE F REORG) QSub election filed Form 8869 makes the old company tax-invisible ≥ 2-DAY WAIT Required gap before the next step BEFORE CLOSING Converted to an LLC The company becomes an LLC, still tax-invisible CLOSING DATE Rollover + cash purchase, at once Buyer ends up with 100% of the LLC

Reading left to right: the contribution and QSub election happen back-to-back on Day 0 (together, the F Reorganization); a mandatory two-day-plus wait separates that from the statutory conversion into an LLC; the LLC then sits in place until Closing, when the rollover and cash purchase transfer full ownership to the buyer.

The steps, in order

A group of shareholders owns a corporation — call it "Target Corp." It has been an S corporation, without interruption, since its original election. From there:

01
The shareholders contribute their stock
The shareholders contribute all of their stock in Target Corp to a brand-new holding company — call it "New Holdco" — in exchange for 100% of the stock of that new company. Nothing is bought or sold and no cash moves. They end up owning the new company instead of the old one directly, and the new company owns the old one.
02
An IRS form is filed
Right after that contribution, New Holdco files a one-page IRS form (Form 8869) electing to have Target Corp treated as invisible for tax purposes — a QSub. Target Corp still exists as a legal matter, but going forward the IRS taxes it and its parent as a single company. This step and Step 1 together are called an F Reorganization — a type of restructuring the tax code allows to happen without triggering a tax bill, specifically because the new structure is treated as a continuation of the same company, not a new one.
≥2d
A required waiting period
At least two days have to pass before the next step. This isn't a negotiation point — it's a technical requirement that keeps the reorganization and the next step (the conversion) as two clearly separate transactions in the eyes of the IRS.
03
The company becomes an LLC
Target Corp then converts — by a routine state-law filing — from a corporation into an LLC: "Target Corp, LLC." This is not a sale, a liquidation, or a new company standing up. It is the same continuous business, changing its legal form the same way a corporation might change its name. Because the IRS was already treating it as invisible (Step 2), the new LLC is automatically invisible for tax purposes too.
04
Closing — paid two ways at once
At closing, two things happen simultaneously. First, New Holdco contributes part of its LLC ownership to the buyer in exchange for ownership units in the buyer's company — this is the rollover, the sellers' continuing stake in the business going forward. Second, the buyer purchases the rest of the LLC ownership from New Holdco for cash. Between the two, the buyer ends up owning 100% of the LLC, and the sellers end up with a mix of cash and an ongoing ownership position.

The Structure, Step by Step

The Shareholders Owners of Target Corp before the restructuring F REORGANIZATION — NO TAX TRIGGERED Target Corp Corporation · S corporation Step 1: stock contributed New Holdco New holding company · 100% owned by the shareholders Target Corp — now tax-invisible (Step 2) AT LEAST 2 DAYS LATER Step 3: becomes an LLC Target Corp, LLC LLC · tax-invisible, owned by New Holdco STEP 4 — AT CLOSING: ROLLOVER + CASH PURCHASE, AT THE SAME TIME The Buyer Owns 100% of Target Corp, LLC

Stock is contributed to a new holding company and an IRS election is filed (together, the F Reorganization); a mandatory two-day wait follows; the subsidiary becomes an LLC; and at Closing ownership splits between rollover units in the buyer's company and a cash payment.

Why go through all of this?

It preserves the S corporation tax status the company has always had, so the restructuring itself doesn't create a tax bill for the sellers. By the time of closing, the business sits inside a single, simply-owned LLC — the clean structure buyers in deals like this typically expect to acquire. None of these steps change how the business operates, who runs it, or what it's worth.

Tax & Structuring F Reorganization Pre-Closing Restructuring S Corporation

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