Quasi-Reorganization

A “quasi-reorganization” is kind of like the Flex Tape of the business world: it can help a company eliminate its financial woes without actually, fundamentally fixing the issue that caused the woes in the first place. Sometimes, companies can find themselves in a situation where they’ve got a big ol’ deficit in retained earnings. This looks bad on the balance sheets, plus it means that the business (a) can’t pay dividends (because paying out dividends when a business is in debt is a no-no), and (b) is likely scaring off some potential would-be investors with its problematic financials.

In some cases, companies in this predicament would go ahead and file for bankruptcy, which is a pretty drastic measure. But there is another option: the quasi-reorganization.

In this situation, the balance books are basically reset to zero. The organization is given a fresh financial start. The game has been restarted. The deficit in retained earnings is reclassified as paid-in capital, and all assets are revalued according to current market value (which is usually lower than the value initially recorded). No debts are actually paid, and no extra money is physically coming in. All you're doing is moving financial data and transactions around to make the books look better.

If this sounds shady, it can be. But sometimes it’s not. For example, it’s not unheard of for a new business to operate at a loss for its first few years. But we don’t want those operating losses following us around for the rest of our lives, so once we start turning a profit, we’ll go the quasi-reorganization route, so we can essentially start over in the eyes of the investment world. Plus, if we move all that deficit stuff over to the paid-in capital side of the equation, we can start paying out dividends, which shareholders tend to like. It’s not an ideal solution all the time, and in fact, it’s not even legal in every state to do this. It’s actually a pretty obscure accounting method in real life, but it just might be a good choice for a company looking to restart its financial game clock.