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How To Convert An LLC To A Corporation In Arizona
For one reason or another, some Arizona companies find themselves in a position in which they would like to change their business structure from a Limited Liability Company to a Corporation, or some other conversion from one structure to another. This article discusses the conversion from a traditional Arizona LLC to a privately-held corporation because it tends to be one of the more common conversions. If you are considering converting, consult with legal and tax professionals to ensure you are making the best decision with all the information you need. Making the conversion may be the best thing for your company in the long run, but it takes time and money, so doing your homework ahead of time on whether it is the best decision and how to go about it is an absolute must.
Be sure to do an audit of all your LLC’s contracts, leases, and insurance, to ensure that they will not be nullified if you go through the conversion process. Some of these things can be remedied, but you do not want to get through the process without knowing the effect on these important parts of your business.
There are three ways to go about a conversion: (1) Statutory Merger, (2) Statutory Conversion, and (3) Non-statutory conversion. Regardless of which method you use, you will need to meet all the formal requirements of forming a corporation. As discussed in our other articles, while these stringent formalities sometimes cause people to opt for an LLC, if you are considering this conversion you obviously see the benefits of a corporation and the
formalities are worth the trouble. Here are a few reminders of what needs to be done.
1. Draft and file your articles of incorporation
2. Create bylaws
3. Select and designate officers
4. Hold the first board meeting
5. Issue stock
A statutory merger automatically transfers your AZ LLC’s assets and liabilities to the new corporation by operation of law. In a statutory merger, you have to create your new corporation as a new business before that transfer can happen. You will also need a merger agreement to exchange membership rights from the LLC for shares in the new corporation.
Once the conversion is complete, you will also need to dissolve the LLC.
Although not intended to be completely exhaustive as each of the following steps have their set of steps and procedures, the general process of conversion by statutory merger looks like this:
- Create the new corporation. This must be done using the corporation formalities discussed above in order to benefit from the protection from liability a corporation provides. Also, it must be done prior to the conversion.
- Prepare a Plan of Merger
- Get LLC member approval of the Plan of Merger
- Have your corporation’s board of directors adopt the plan of merger
- Secure shareholder approval of the Plan of Merger. Notice that even if the LLC members are the exact same people as the group of shareholders, the approval of the Plan of Merger must be done separately in their capacity of the two separate entities.
- File Articles of Merger with the Arizona Corporation Commission.
Statutory conversion is a streamlined process in changing a business structure. It is the cheapest and easiest way to effectuate a conversion of this kind. With that being said, it is not currently available in Arizona. Although, the majority of other states provide it as an option, so you may check with the Secretary of State or Arizona Corporation Commission to see if it is available at a later date. Here is the current position as stated on the Arizona Corporation Commission Website:
Conversion is not allowed under Arizona law. A corporation can merge with or into an LLC, but cannot simply convert to an LLC. You should consult with an attorney so that you can receive appropriate legal advice for your particular needs. The A.C.C. cannot advise you about mergers or any other legal issue. http://www.azcc.gov/Divisions/Corporations/faq.asp#corp18
Statutory conversion essentially requires the converting LLC to fill out the necessary paperwork and pay the required fees. Then, as a matter of law, the new corporation is formed with the organization and formalities of a corporation replacing the structure of the LLC. The old LLC is dissolved and the new corporation is formed. The assets are transferred and the members become shareholders. Prior to this all taking place, however, the members of the LLC must sign a plan of conversion and submit it with the application and paperwork. All the formalities of creating the corporation, however, do not need to be done prior to the conversion as in a statutory merger.
This is the most expensive and complex way to do a conversion from an LLC to a corporation. The following is a very simplified outline of the steps required:
- Create a new corporation
- Formally transfer your LLC’s assets and liabilities to the corporation
- Formally arrange the exchange of LLC membership for corporate shares
- Formally liquidate and then dissolve the LLC.
These steps may seem similar to the ones in statutory merger and statutory conversion, but there is a major difference that gives rise to the increase in difficulty and cost. In this method the LLC’s assets and liabilities do not automatically transfer to the new corporation. As a result, you will need multiple, separate agreements to transfer the assets and liabilities, in addition to the agreements that are required in a merger to arrange the exchange of LLC ownership for corporate shares. Fortunately, you can generally avoid the need to use this approach.
This article is intended to provide an outline and some basic understanding on converting your business from an LLC to a corporation. It is not intended to be a step-by-step guide, and there is far more to the process than what can be contained in this article. In truth, a merger is a fairly complex transaction that should be done with competent Arizona business attorneys and tax professionals involved throughout the process.
Contact Gunderson, Denton & Peterson, P.C. today!
Written By: Brad Denton
1930 N. Arboleda, Suite 201
Mesa, Arizona 85213
40 N. Central Avenue, Suite 1400-1532
Phoenix, AZ 85004
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Mesa, AZ 85213