F Reorganization for an S Corp Sale: QSub Structure, Steps and Cost

Short answer: An F reorganization is a tax-free restructuring under section 368(a)(1)(F) that turns an S corporation into a new holding company with the old operating entity underneath it as a qualified subchapter S subsidiary, which is then usually converted to an LLC. It exists so a buyer can get a stepped-up basis in the assets while the deal still closes as a simple equity purchase, and so sellers can roll equity forward without tax. The regulation lists six requirements that all have to be met. Nobody publishes a fixed price for one. Last updated September 2026. Educational only, not tax or legal advice.

Why an F reorganization exists at all

Every sale of a profitable small company runs into the same argument. The buyer wants an asset purchase, because it gets a fresh basis in the intangibles it is paying for and can amortize them over fifteen years under section 197, and because unknown liabilities stay behind. The seller wants a stock or equity sale, because it is simpler, because it moves the contracts and licenses without a consent hunt, and because the tax outcome is usually better. Both positions are reasonable. Neither side is being difficult.

An F reorganization is the structure that stops the argument. It reshapes the target before the deal so that the buyer purchases interests in a disregarded entity, which the federal tax rules treat as buying the underlying assets, while the paperwork is a single equity purchase agreement. The buyer gets the basis step-up it wanted. The seller sells equity. Nobody has to assign every customer contract one by one.

The mechanics matter less than the timing. This is a pre-sale restructuring, and it has to be finished, or at least well under way, before the deal documents are drafted. Sellers who first hear the phrase in week five of diligence are the ones who end up conceding an asset sale on price pressure. It belongs in the same early conversation as the letter of intent, not after it.

What is an F reorganization?

Section 368(a)(1)(F) covers "a mere change in identity, form, or place of organization of one corporation, however effected." The regulation at 26 CFR 1.368-2(m)(1) puts it more precisely: a transaction is a mere change and qualifies "only if all the requirements set forth in paragraphs (m)(1)(i) through (vi) of this section are satisfied." In an S corporation sale the mere change is the insertion of a new parent above the existing company, with the shareholders ending up owning the new parent in exactly the proportions they owned the old one.

The six requirements, from the regulation itself

These were read from the current text of 26 CFR 1.368-2(m) on the eCFR on 4 September 2026. They are worth reading in the original because most summaries collapse them into three, and the two that get dropped are the ones that fail in practice.

Requirement	What it requires
(m)(1)(i)	New parent stock issued in exchange for old stock
(m)(1)(ii)	Identical owners in identical proportions, before and after
(m)(1)(iii)	New parent holds no property and no tax attributes
(m)(1)(iv)	Old company fully liquidates for federal tax purposes
(m)(1)(v)	Only the resulting corporation acquires the assets
(m)(1)(vi)	Only the transferor corporation is acquired

The regulation's own words are worth having, because the summaries paraphrase away the exceptions. Requirement (i) is that "all the stock of the resulting corporation, including any stock of the resulting corporation issued before the potential F reorganization, must have been distributed (or deemed distributed) in exchange for stock of the transferor corporation," with a de minimis carve-out for shares issued to organize the new entity. Requirement (ii) is that "the same person or persons must own all of the stock of the transferor corporation, determined immediately before the potential F reorganization, and of the resulting corporation, determined immediately after the potential F reorganization, in identical proportions."

Requirement (iii) says the resulting corporation "may not hold any property or have any tax attributes (including those specified in section 381(c)) immediately before the potential F reorganization," again with a de minimis exception for assets held to organize it or keep it alive, and for borrowing proceeds raised in connection with the transaction. Requirement (iv) says the transferor "must completely liquidate, for federal income tax purposes," while expressly not requiring dissolution under state law. Requirements (v) and (vi) close the structure at both ends: no corporation other than the resulting corporation may end up holding the transferor's former property where it would succeed to the section 381(c) items, and the resulting corporation may not hold property acquired from any corporation other than the transferor on the same terms.

Two further points in the same regulation do a lot of quiet work. Paragraph (m)(2) states that "a continuity of the business enterprise and a continuity of interest are not required for a potential F reorganization to qualify," which is why an F reorg survives a sale that would break those tests in any other reorganization. And paragraph (m)(3)(ii) says a qualifying F reorganization "may occur before, within, or after other transactions that effect more than a mere change, even if the resulting corporation has only transitory existence," and that related events preceding or following it generally will not disqualify it. That sentence is the legal basis for doing this specifically in order to sell.

How the structure actually gets built

The sequence is short and every step has a document behind it. First the shareholders contribute their stock in the operating S corporation to a newly formed corporation, receiving stock in the new parent in the same proportions. The new parent elects S status. Second, the parent elects to treat the old operating company as a qualified subchapter S subsidiary. Section 1361(b)(3)(A) then provides that a QSub "shall not be treated as a separate corporation," and that all its assets, liabilities and items of income, deduction and credit are treated as those of the S corporation. Section 1361(b)(3)(B) requires that 100 percent of the subsidiary's stock is held by the S corporation and that the S corporation makes the election.

Third, the operating subsidiary is usually converted to a single member LLC under state law. It was already disregarded for federal tax purposes as a QSub, so this changes nothing federally, but it means the buyer can purchase LLC membership interests. Because the entity is disregarded, a purchase of interests in it is treated as a purchase of an undivided interest in the underlying assets, which is where the basis step-up comes from.

The employer identification number stays with the historic entity, which is one of the practical reasons this route is preferred over simply forming a new company. Contracts, licenses, payroll accounts and merchant relationships generally continue in the same legal entity, so the consent hunt that makes an asset sale painful is largely avoided.

How much does an F reorganization cost?

No law firm or accounting firm we could find publishes a fixed price for one, and we looked on 4 September 2026. That is the honest answer and it is worth saying plainly, because several figures circulate on content sites with no primary source behind them and we are not going to repeat them. What can be checked is the hourly market. On ContractsCounsel, which publishes real project averages, standard practitioner rates run $100 to $350 an hour, a business or corporate lawyer $250 to $400, a large firm associate $450 to $650, and a large firm partner $700 to $1,200.

The work itself is a defined package: formation documents for the new parent, a contribution agreement, the S election for the parent, the QSub election, a state law conversion of the subsidiary, and the tax opinion or memorandum that supports the whole thing if the buyer asks for one. It is not open-ended litigation. Ask for a fixed fee quote and a list of deliverables, and ask specifically whether a tax opinion is included, because that is the line item that moves a quote the most.

Why do buyers want an F reorganization?

Because it gives them the tax result of an asset purchase inside the paperwork of an equity purchase. The stepped-up basis flows into amortizable intangibles under section 197, which is real cash back over fifteen years, and the allocation of that basis across asset classes is the same exercise as any purchase price allocation on a deal. A buyer also gets some separation from the historic entity's income tax exposure, though that is a matter of contract terms and structure rather than an automatic result.

There is a second reason that gets less attention. The structure supports tax-deferred rollover equity. If the sellers keep a minority stake in the operating LLC rather than cashing out completely, an F reorganization is one of the cleaner ways to do it without triggering tax on the retained piece, which is why private equity buyers ask for it so consistently on lower middle market deals.

Does an F reorganization terminate the S election?

Not when it is done correctly. The new parent elects S status and the historic operating entity becomes a QSub, so S treatment continues without a gap. What does end the S election is a buyer that is a corporation or a partnership acquiring the equity, since those are not eligible S corporation shareholders, and that is precisely why the structure puts a disregarded LLC in front of the buyer rather than S corporation stock. Getting the election timing wrong is the most common way this structure fails, and it fails silently.

Do I need an F reorganization if my company is an LLC or a C corporation?

No. This is an S corporation problem and an S corporation solution. An LLC taxed as a partnership already gives a buyer a basis step-up on a purchase of interests without any restructuring. A C corporation has a different set of trade-offs entirely, and for a C corporation shareholder the more important question is usually whether the shares are qualified small business stock, because that determines whether the gain is taxed at all. If that applies to you, read the QSBS exclusion rules under section 1202 before you agree to any structure, since an asset sale switches that exclusion off completely.

F reorganization or a 338(h)(10) election?

Both get a buyer a basis step-up on the purchase of an S corporation, and they are genuine alternatives rather than one being obviously better. A section 338(h)(10) election is made jointly on a qualified stock purchase and treats the deal as a deemed asset sale. It is simpler to describe and requires no pre-sale restructuring, but it depends on the target's S election being valid, which puts the seller in the position of guaranteeing a status that may rest on paperwork from a decade ago. It also does not accommodate rollover equity comfortably.

An F reorganization costs more up front and takes longer, but it does not require the S election to have been perfect historically in the same way, and it handles rollover equity naturally. Buyers with repeat deal experience tend to prefer it for those two reasons. Sellers should care about the difference because the representation they are asked to give about the S election is not a formality.

How long does an F reorganization take?

Typically a few weeks of legal work rather than months, though it depends on how quickly state filings are processed and how clean the existing corporate records are. The delay is almost never the tax analysis. It is finding the original S election, reconstructing stock issuances that were never properly documented, and confirming that ownership is what everyone believes it is. Companies that have kept a tidy minute book move fast. Companies that have not will spend most of the calendar on archaeology.

That record-gathering overlaps almost exactly with what a buyer's diligence will ask for anyway, so it is not wasted. Buyers also want financial statements they can read rather than an accounting export, and if yours are not in that shape yet you can turn the bookkeeping data into board-ready statements before the process starts rather than during it.

What can go wrong

The failures cluster in three places. First, ownership proportions: requirement (m)(1)(ii) demands identical proportions immediately before and immediately after, so anything that changes the cap table inside the restructuring window breaks it. Bring the buyer in afterwards, not during. Second, the new parent: requirement (m)(1)(iii) means it must be genuinely new and empty, so recycling a dormant entity someone formed years ago is a real risk. Third, the old entity: requirement (m)(1)(iv) requires a complete liquidation for federal tax purposes, which the QSub election accomplishes, and skipping or mistiming that election leaves you with two separate corporations and no F reorganization at all.

None of those are exotic. They are all sequencing errors, and they are all avoidable by doing the work before a buyer is at the table rather than under a signing deadline.

Where this leaves a seller

If your company is an S corporation and you expect to sell it, treat the F reorganization question as part of preparing the business rather than part of negotiating the deal. It costs a defined amount of legal work, it removes the single most common structural fight in a small company sale, and it makes your business easier for an experienced buyer to say yes to. The alternative is arriving at a term sheet with a buyer who wants assets, a structure that cannot deliver them cleanly, and no leverage left to price the difference. That trade-off is the same one at the heart of the asset purchase versus stock purchase decision, and it is worth understanding before the first offer, not after.

Then get the rest of the file in order. Whatever the structure, a buyer is going to test trailing revenue, gross margin, churn and customer concentration against source data, which is why every listing on Buyouts publishes verified MRR, ARR, growth and churn before it goes live, and why the terms you negotiate in the purchase agreement will be shaped by numbers somebody can actually check.