When your startup undergoes a stock-for-stock reorganization, the focus is usually on federal tax deferral under IRC §368(a)(1)(B) but if your company operates in California, the Franchise Tax Board (FTB) may have a different take.
Many founders, CFOs, and legal teams overlook the state-level tax implications of stock swaps, especially when:
- Entities involved are incorporated in Delaware or out-of-state
- Operations or employees are California-based
- The transaction is part of a merger, acquisition, or Series D restructuring
In this blog, we explain how California treats stock-for-stock reorganizations, where franchise tax traps lie, and what you must file to remain compliant .
What Is a Stock-for-Stock Reorg?
A stock-for-stock reorganization typically involves Company A acquiring Company B by issuing shares of its own stock, instead of cash. Under IRC §368(a)(1)(B), this is considered a tax-free reorganization meaning no gain or loss is recognized at the federal level if certain rules are followed.
But California’s Revenue & Taxation Code (R&TC) doesn’t automatically conform to all federal reorg provisions.
California’s Franchise Tax View
California may treat the transaction differently for:
- Franchise tax nexus and fee calculations
- Transfer of assets and apportionment factors
- Entity status and continuation
Even if the federal reorganization is tax-free, the Franchise Tax Board may require:
- A final CA Form 100 for the target entity
- A new registration or SOS filing for the acquiring entity in California
- Minimum franchise tax for the “new” entity, even if no cash was exchanged
Example: Reorg Without Cash Triggers CA Franchise Tax
Scenario:
Company A (Delaware C-Corp, not registered in CA) acquires Company B (Delaware C-Corp, operating in San Jose) in a stock-for-stock merger under IRC §368. No money changes hands.
Federal outcome: No tax due; stock swap qualifies as tax-free.
California outcome:
- Company B owes final CA Franchise Tax via Form 100
- Company A, now operating in CA post-reorg, must register in CA, file Form 100, and pay $800 minimum franchise tax
- If there’s a delay in registration or non-filing, penalties apply under R&TC §19131
What VCs and Legal Teams Check
- Is the acquiring entity properly registered with California SOS?
- Were final and initial Form 100s filed post-reorg?
- Is there overlap in apportionment or payroll that affects franchise fees?
- Was the built-in gain tracked and properly deferred?
- Are both sides of the transaction disclosing the reorg on returns?
Key Franchise Tax Filings Required
| Form | Purpose |
|---|---|
| Form 100 | CA Corporation Franchise or Income Tax Return |
| Form 100X | Amended CA return (if cleanup is needed) |
| Form 3522 | Payment of $800 minimum franchise tax |
| SOS Statement of Information | Register acquiring entity post-reorg |
| FTB 3544 | Assignment of tax attributes, if applicable |
Step-by-Step: Stay Compliant in a Stock Reorg
- Review Both Entities’ Status with the CA SOS
- Make sure both the target and acquiring entities are registered properly in CA
- File updated Statements of Information
- File Final & Initial Franchise Tax Returns
- File Form 100 for the terminating company
- File a new Form 100 for the surviving/acquiring entity if it’s a new CA taxpayer
- Pay Minimum Franchise Tax
Even if there’s no revenue, CA imposes an $800 tax on every corporation doing business in the state. - Amend if Missed
Use Form 100X if you need to correct or clean up historical CA filings due to merger activities. - Track Built-In Gains
If assets were transferred, track any deferred gains using federal and CA rules especially if an IPO is in sight.
Conclusion: Don’t Let CA Franchise Tax Catch You Off Guard
Stock-for-stock mergers may seem clean on the federal side, but in California, they raise multiple compliance questions. Whether you’re restructuring before a raise, merging entities before an exit, or consolidating VC-backed holdings be sure your CA franchise tax filings and registrations are correct.
A small oversight in Form 100 or entity registration can cost you in penalties, delays, and back-tax notices especially .
Get Help Before It’s a Problem
Anshul Goyal, CPA EA FCA helps startups and VC-backed businesses navigate complex restructurings, stock-for-stock mergers, and California FTB compliance. As a U.S.-licensed CPA and IRS Enrolled Agent, he’s uniquely positioned to coordinate federal + California tax treatments.
Schedule a Tax Strategy Call Now
Disclaimer
This blog is for informational purposes only and is not legal or tax advice. Please consult a qualified CPA or legal advisor before taking action. Information is current as of the tax year and subject to change.
FAQs: Stock-for-Stock Reorgs in CA
- Do I need to file a final CA Form 100 after a stock-for-stock merger?
Yes, if your entity ceases operations or merges, a final return is typically required. - What if both entities are Delaware-based?
If either operates in CA or has employees, California filing obligations apply. - Does California recognize tax-free reorgs under IRC §368?
Not automatically. You still have to meet California registration and franchise tax rules. - Can the acquiring entity delay paying franchise tax?
No. $800 minimum tax is due for every year of operation or presence in California. - What if I forgot to register the new entity with CA SOS?
You could face penalties. File your Statement of Information and back taxes as soon as possible.
About Our CPA
Anshul Goyal, CPA EA FCA is a U.S.-licensed Certified Public Accountant, IRS Enrolled Agent, and Fellow Chartered Accountant. He specializes in cross-border and state-level tax issues, franchise tax planning, and entity restructuring across CA, DE, TX, and NY.