Sometimes shareholders in a corporation, which is engaged in multiple types of businesses under one legal entity, find a need to go their separate ways for any number of reasons. The ideal approach would be to do so on a tax-free basis and without costly disputes among themselves.
One approach is to use a corporate split-off as provided under Section 355 of the Internal Revenue Code. Here the corporation would form a new subsidiary and transfer the applicable assets to it in exchange for all of its issued common stock. Then the shareholder departing would transfer his or her shares in the existing corporation for all of the shares of the new subsidiary as provided in a corporate split-off agreement. There are numerous tests that must be met for tax-free treatment. But this approach offers a handy way to effectuate a legal separation of the shareholders in a less stressful and more economical manner than litigating the break-up of their corporation.
Michael W. Margrave