Nonprofits and the Arizona Entity Restructuring Act

Arizona Entity Restructuring Act for Nonprofits

In the dynamic world of nonprofits, adaptability and strategic planning are key to success. Organizations often find themselves at a crossroads where restructuring becomes essential for fundraising, asset protection, public support test matters, flexibility in operations, efficiency, or taking advantage of new opportunities. The Arizona Entity Restructuring Act (AERA) is a valuable tool for organizations in the state looking to make significant changes to their organizational structure. In this blog post, we will explore the key aspects of the AERA and how it can empower nonprofits to navigate the complexities of restructuring.

Why Arizona Adopted AERA

Before the adoption of AERA, Arizonans encountered difficulties when trying to restructure. The laws were challenging to locate as they were dispersed across various titles and types of business entities. The lack of a comprehensive statutory framework resulted in complex, multi-step transactions and omitted vital components available in other states such as domestications and divisions. Procedural disparities mandated distinct requirements for identical transactions depending on the entity form, resulting in difficult, uncertain, and expensive transactions.

AERA was established to provide a clear framework for nonprofits and other businesses restructuring. AERA encompasses a range of transactions such as mergers, conversions, interest exchanges, domestications, and divisions. This legislation offers a streamlined process for nonprofits and other businesses seeking to modify their organizational structure, facilitating a more efficient and legally sound transition.

  1. Mergers:
    • The AERA allows businesses to merge with one or more entities, providing a pathway to combine resources, optimize operations, and enhance competitiveness.
    • Merging under the AERA involves a comprehensive process, including drafting a plan of merger, obtaining approval from the board and shareholders, and filing necessary documents with the Arizona Corporation Commission (ACC).
  2. Conversions:
    • Businesses looking to change their legal form or structure can utilize the AERA for conversions. For example, a corporation may choose to convert from a limited liability company (LLC) to a nonprofit corporation or vice versa.
    • The conversion process involves drafting a plan of conversion, obtaining necessary approvals, and filing documents with the ACC.
  3. Interest Exchange: Interest exchanges permit owners or, in the nonprofit context, members to exchange their rights in one company for rights in another company.
  4. Domestications:
    • The AERA also allows businesses to move their jurisdiction to or from Arizona seamlessly through a process known as domestication.
    • Companies seeking to move into or out of Arizona need to follow the specified steps, including drafting a plan of domestication and obtaining required approvals.
  5. Divisions: This streamlines the process of an entity dividing into two or more entities.

Benefits of Restructuring under the AERA:

  1. Legal Clarity:
    • The AERA provides a clear legal framework for businesses undergoing restructuring, reducing uncertainties and potential legal challenges.
  2. Efficiency:
    • The streamlined process outlined in the AERA helps companies save time and resources during the restructuring process, allowing them to focus on their core operations.
  3. Flexibility: Organizations have the flexibility to choose the type of restructuring that aligns with their goals, whether it’s merging with another entity, converting to a different legal structure, or domesticating to a new jurisdiction.
  4. Tax Identity: Entities can change their form and retain their tax identity and tax identification number which is a significant benefit for a tax-exempt nonprofit.

Limitations of AERA for Nonprofits:

Note that AERA does not apply to a corporation changing its form from a non-profit corporation to a for-profit corporation or vice versa. AERA only applies when an entity is changing from one entity type to another. Further, while AERA does apply to trusts, it unfortunately excludes charitable trusts.

Conclusion:

The Arizona Entity Restructuring Act offers a valuable resource for nonprofits and other entities seeking to evolve and adapt in a rapidly changing business environment. Whether it’s pursuing mergers, conversions, or domestications, the AERA provides a well-defined legal framework, promoting efficiency and legal clarity throughout the restructuring process. By understanding and leveraging the provisions of the AERA, nonprofits and other businesses in Arizona can position themselves for success more efficiently than ever before.

Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on federal tax and fundraising regulations nationwide. Ellis also advises donors concerning major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form

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