Changing Business Structures: Entity Conversion in Arizona

As businesses change, sometimes their structures should, too.

For a variety of reasons, companies large and small sometimes decide to change the way they are legally structured. This structural change, also known as entity conversion, can take many different forms. For example, a limited liability company may want to convert into a privately held corporation, or vice versa. Some of the reasons entities decide to restructure in this way are to reduce tax burdens, to bring in new investors, or to relocate the business from one state to another.

Prior to 2015, Arizona companies trying to convert their business from one type of legal entity to another were forced to go through an expensive and time consuming process called “statutory merger.” This meant that to convert a company from one entity type to another, you first had to create a new and separate entity, merge the old entity into the new, and then dissolve the old entity. To make matters worse, Arizona’s entity conversion laws were inconsistent and incomplete, having different requirements for different types of entities, and offering no guidance for certain types of transactions.

The Arizona Entity Restructuring Act

Fortunately, in 2015, Arizona adopted the Arizona Entity Restructuring Act (the “Act”) (A.R.S. §§ 29-2101 through 29-2703). The Act provides a comprehensive statutory framework for these types of transactions. Under the Act, entity conversion can to be done through a much more streamlined process called “statutory conversion.”

Here is how statutory conversion works: First, the converting entity must approve a written plan of conversion. The plan should include details like how the company proposes to convert the rights, interests and obligations of the old entity into the new, and other important information. The plan must then be approved by the company in accordance with the organizing document of the entity (or Arizona’s default rules if the entity’s organizing document gives no guidance). Second, the converting entity must file a statement of conversion with the appropriate filing authority (the Arizona Corporate Commission or the Secretary of State, depending on the type of conversion). Once the statement of conversion is approved by the appropriate authority, the entity conversion is complete.

The Act has greatly reduced transaction cost and given more flexibility to Arizona businesses. Nevertheless, businesses thinking about restructuring should consult a qualified attorney before taking the plunge. Conversion may affect the way the business is taxed, how profits and decision making powers are allocated, and could affect the company’s existing contracts.

Please note that the preceding information is informational only, and it is not intended to be legal advice. If you are interested in restructuring your business, call the experienced business attorneys at Harlow Spanier & Heckele to schedule a consult at (520) 369-4274 or email [email protected].