Arizona entities have received some clarity on entity restructuring transactions under the Arizona Entity Restructuring Act (“AREA”).
An entity restructuring transaction is used when an entity wants to change its structure in one of several ways. The reasons for such a change vary and may be driven by business, legal, or tax considerations. For example, a social entrepreneur tests her idea in an LLC and determines capital markets are just not getting it done for her venture. She decides that if she could access philanthropic markets the venture may be sustainable. In this scenario, she may decide to use AREA to convert her Arizona LLC to an Arizona nonprofit corporation. The reverse, however, is more complicated. Although AREA facilitates the state-level change, the Internal Revenue Code and the organization’s governing documents may still control; think dissolution clause for nonprofits. Federal and other regulatory overlays must not be forgotten when considering a restructuring transaction of any kind; not just those involving nonprofits.
The types of entity restructuring transactions AREA addresses are:
- Interest Exchanges
Prior to passage of AREA, an entity seeking to change its structure likely had to undergo a multi-step transaction to accomplish its goal. AREA permits direct conversions and makes clear that it applies to all entity types (corporations, nonprofits, benefit corporations, LLCs, partnerships, etc.). AREA also:
- Streamlined the procedure for filing with respect to mergers and domestications;
- Allows conversion of one entity type to another (e.g., corporation to LLC);
- Changed share exchange to interest exchange; and
- Allows division.
Finally, the statutes related to entity restructuring transactions can be easily referenced in a signal statute title. AREA can be found in Sections 29-2101 through 29-2703 of the Arizona Revised Statutes. The Arizona Corporation Commission has also provided a form for the statements required to be filed under AREA.