DEAL STRUCTURE
F reorganization: why buyers ask for one
An F reorganization is a pre-closing restructuring, described in IRS Revenue Ruling 2008-18, that buyers of S corporations often request. The owners form a new holding company, the practice becomes its subsidiary and then converts to an LLC, and the buyer buys that LLC. For tax purposes the buyer gets asset-purchase treatment and a stepped-up basis; legally, the operating entity, its tax ID, and often its contracts carry on. It is common in private equity deals that include rollover equity.
By Akim Guennani, Founder · Updated October 2026
2008-18
IRS revenue ruling addressing the F reorganization structure
8869
IRS form used to make the QSub election for the target
100%
Target stock the new parent must own for a QSub election
The steps
The exact sequence is set by tax counsel, but the core steps described in Revenue Ruling 2008-18 and practitioner commentary are consistent.
- 1. New holding company
- The owners form a new S corporation and contribute all stock of the practice to it.
- 2. QSub election
- The holding company elects to treat the practice as a qualified subchapter S subsidiary on IRS Form 8869.
- 3. LLC conversion
- The practice converts to a single-member LLC under state law.
- 4. Sale
- The buyer purchases all or part of the LLC interests from the holding company.
Why buyers like it
Buying an S corporation's stock directly gives the buyer no tax basis step-up and carries the risk that the S election was invalid at some point. An F reorganization lets the buyer purchase LLC interests, which is treated as an asset purchase for tax, while the S election of the original company carries over to the new holding company. It also makes it straightforward for you to roll over part of your equity into the buyer.
What it means for a healthcare seller
Because the operating entity continues, an F reorganization can avoid some of the license and contract transfers an asset sale would require. But converting to an LLC and changing the parent may still trigger notices or approvals under state licensing rules, Medicare enrollment reporting, and payer contracts. Have tax counsel and regulatory counsel review the steps together, and check the timing of the QSub election, which practitioners flag as a common trap.
Practitioner cautions
Tax advisers who use this structure regularly flag a few recurring issues. The timing of the QSub election relative to the contribution of stock matters, and BDO has written specifically about getting it right. State and local tax treatment can differ from the federal result, as The Tax Adviser has discussed, including transfer taxes and how the new holding company is treated.
For healthcare sellers there is an extra layer: state licenses, Medicare and Medicaid enrollment, and payer contracts each have their own rules about changes in ownership, organizational form, or the identity of the parent company. Those rules decide whether the F reorganization truly keeps everything in place.
| Structure | Tax treatment for buyer | Legal entity |
|---|---|---|
| Stock purchase | No basis step-up | Entity continues |
| Asset purchase | Basis step-up | Buyer's entity; licenses and contracts transfer or are re-obtained |
| F reorganization then LLC sale | Treated as asset purchase; basis step-up | Operating entity continues as an LLC |
Questions to ask before you agree
Raise these with your tax and regulatory advisers early.
Owner checklist
- Is the S election valid for every year since it was made?
- When will the QSub election be filed relative to the stock contribution?
- Which state licenses require notice or approval for the LLC conversion?
- Does Medicare enrollment need to be updated for the new parent?
- Do payer contracts restrict changes in organizational form or control?
- How will the purchase price be allocated for tax purposes?
How Lartico fits in
Most private equity buyers in Lartico's network have completed F reorganizations before. That experience shortens the time it takes to agree on structure once you choose which buyers to speak with.
Sources and methodology
Public transactions provide market context, not a valuation quote for a private practice. Illustrative examples use hypothetical assumptions and are not predictions. This guide is educational and is not legal, tax, accounting, or investment advice.
- 1. Revenue Ruling 2008-18 (Internal Revenue Service). IRS treatment of the F reorganization structure.
- 2. About Form 8869, Qualified Subchapter S Subsidiary Election (Internal Revenue Service). The QSub election form.
- 3. F reorganization under Rev. Rul. 2008-18: timing of QSub election is key (BDO). QSub election requirements and timing.
- 4. State and local considerations in an F reorganization acquisition (The Tax Adviser). State and local tax issues in F reorganization acquisitions.
Reviewed October 2026
Questions owners ask
Straight answers, before you commit to anything.
What is an F reorganization?+
A tax-free reorganization under Section 368(a)(1)(F), used before a sale so the target S corporation becomes an LLC under a new holding company. IRS Revenue Ruling 2008-18 addresses the structure.
Why does the buyer want an F reorganization?+
It gives the buyer asset-purchase tax treatment and a basis step-up while legally buying an entity, and it simplifies tax-deferred rollover equity for the seller.
Does an F reorganization change my taxes as a seller?+
The sale of LLC interests is generally taxed like an asset sale, so the purchase price allocation matters. Your tax adviser should model the result against a stock sale.
Will an F reorganization affect my licenses?+
It can. The LLC conversion and new parent may require notices or approvals under state licensing rules, Medicare enrollment, and payer contracts. Regulatory counsel should review it before the steps begin.
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