The Arizona Entity Restructuring Act: New Law To Increase Efficiency and Lower Cost For Arizona Businesses
January 21, 2015
By Christopher J. Charles, Esq. &
special guest Andy G. Anderson, Esq.
Many prudent real estate professionals form a business entity such as an LLC or PLLC for their business. On January 1, 2015, Arizona introduced a more business-friendly legal framework for entity restructuring transactions. Thanks to this new law, these transactions will be more efficient and available at a lower cost.
Background: What is an Entity Restructuring Transaction?
It’s not uncommon for a business to reach a point in its life where it needs to undergo an “entity restructuring transaction” – a transaction to change its form or location. There are five reasons why a business entity transaction may be required. For example, you might have started your family-owned business as a partnership, and now the business has attracted new members or investors. Or perhaps your real estate investment company needs to divide into one or more new limited liability companies to diversify or to help manage risk.
Here is a brief summary of the five different entity restructuring transactions: (1) a merger – this occurs when two entities combine into one surviving entity; (2) a conversion – this occurs when a single entity changes form — for example, when a limited liability company converts into a corporation; (3) an interest exchange – this occurs when owners trade their ownership in one company for ownership in another company; (4) a domestication – this occurs when an entity formed in one state changes its state of incorporation to another state; and (5) a division – this occurs when one entity divides into two or more entities.
The Problem: Obsolete Law Governing Intricate, Multi-Step Transactions
Historically, entity-restructuring transactions have required multiple steps to accomplish, ratcheting up risk and expense. Your business may have even needed to dissolve to change its form or location. In that case, you would have needed to wind down the business and satisfy creditors and interest holders, potentially incurring adverse tax consequences. Those consequences erode profitability. And those consequences are counterproductive to a company that simply wants to continue in another form or location.
Compounding the problem, Arizona has not had a comprehensive statutory framework for these transactions. Arizona’s entity restructuring laws were hard to find, scattered throughout Titles 10 and 29 among the twenty-two types of Arizona business entities. And Arizona’s entity restructuring laws were incomplete, leaving out domestications and divisions. And those laws were procedurally inconsistent, imposing different requirements for the same transaction on different entity forms.
The Solution: The Arizona Entity Restructuring Act and its One-Step Transactions
The Arizona Bar and Arizona lawmakers recognized the above problems and have been working over the last four years to implement a solution: the Arizona Entity Restructuring Act (“AERA”), effective January 1, 2015.
In sum, the AERA universally applies to all kinds of business entities. And the law allows your company to change form or location, without dissolving and winding down. Cross-entity transactions are available. And the statute fits with Arizona’s existing laws for business entities, meaning that Arizona’s current corporate and partnership statutes will remain intact. Moreover, these new procedures will not extinguish creditors’ interests as a debtor-entity changes form. Therefore, the AERA allows for seamless, non-disruptive transitions between the old and new companies. Entity restructuring transactions will be more efficient and available at a lower cost.
Here is the simple process for changing an entity’s structure under the AERA.
First, each kind of transaction requires a written plan, one approved by the company’s interest holders. The plan will describe the details and effect of the transaction. You approve that plan according to your company’s organizational documents, such as its bylaws or operating agreement, or AERA’s default rules. Second, once the plan is approved, a statement concerning the transaction must be filed with the appropriate filing authority, which is the Arizona Corporation Commission for corporations, business trusts, and limited liability companies, and the Arizona Secretary of State for limited partnerships and limited liability partnerships. That statement notifies the public of the transaction and identifies the surviving business entity.
To round out this discussion, the AERA does not apply to government agencies, trusts, or estates — and does not displace relevant regulatory statutes, dissenters’ rights, or appraisal rights.
Prudent investors and business owners should wisely chose the correct business entity structure to limit liability and to aggregate capital and assets, such as real estate. Thanks to the AERA, businesses will be better equipped to stay nimble and restructure as needed. The AERA is straightforward and comprehensive. Overall, it encourages new businesses to incorporate or organize in Arizona and simplifies the process for existing out-of-state companies to relocate to Arizona.
Terence W. Thompson and Raj Gangadean, “Coming Attractions for Arizona M&A Practitioners: Preview of the Arizona Entity Restructuring Act” (November 19, 2014).
The National Conference of Commissioners on Uniform State Laws, ed., Entity Transactions Act Summary (available at: uniformlaws.org/ActSummary.aspx?title=Entity Transactions Act, accessed May 20, 2013).
Christopher Charles is a State Bar Certified Real Estate Specialist and a former “Broker Hotline Attorney” for the Arizona Association of REALTORS® (the “AAR”). He is a Partner with the law firm Titus Brueckner & Levine PLC. Christopher is also an Arbitrator and Mediator for the AAR regarding real estate disputes; and he serves on the State Bar of Arizona’s Civil Jury Instructions Committee where he helped draft the Agency Instructions and the Residential Landlord/Tenant Eviction Jury Instructions.
Christopher is a licensed real estate instructor and he teaches continuing education classes at the Arizona School of Real Estate and Business. For a list of upcoming speaking engagements, please visit www.tbl-law.com. Christopher can be reached at email@example.com or at 480-483-9600.