Up-C structure benefits for pass-through businesses in IPO planning: FAQ

An Up-C (umbrella partnership C corporation) structure is a tax-efficient model that allows owners of flow-through entities to go public while retaining partnership taxation benefits. It involves creating a new C corporation (PubCo) that becomes the publicly traded entity and acquires an interest in the existing partnership or LLC.

The Up-C structure is often referred to as a “supercharged IPO” because it can deliver incremental value for legacy owners beyond a traditional IPO. This value comes from tax basis step-ups and tax receivable agreements (TRAs), which allow legacy owners to share in the real cash tax savings generated after the IPO.

The Up-C structure offers a unique combination of tax efficiency, liquidity, and long-term value creation for legacy owners. Here’s what makes it compelling:

Preservation of single-level taxation

Legacy owners continue to enjoy partnership tax treatment, meaning income is taxed only once—at the individual level—rather than facing the double taxation typical of C corporations (i.e. tax at the corporate level and dividend taxation at the shareholder level). This can significantly reduce overall tax burden compared to a traditional IPO structure.

Liquidity for owners with control over timing

Owners receive exchange rights that allow them to convert partnership units into shares of the public company (PubCo) at their discretion. Each exchange is a separate event, so owners can choose when to trigger gains, manage cash flow, and align tax consequences with personal planning objectives.

Tax basis step-up for added deductions

When PubCo acquires partnership interests or when units are exchanged, it receives a step-up in the tax basis of partnership assets. This creates additional depreciation and amortization deductions. These deductions reduce PubCo’s taxable income, which enhances the TRA value to legacy shareholders.

Monetization through tax receivable agreements (TRAs)

TRAs are contracts that share the real cash tax savings from those extra deductions with legacy owners—typically 85% of the benefit. These payments can amount to millions over time, providing a steady stream of additional proceeds beyond the IPO price.

Strategic tax planning opportunities

Because exchanges are elective, owners can defer recognition of gains, potentially benefit from future tax law changes, or even achieve a basis step-up at death. This flexibility allows for sophisticated planning that aligns with long-term wealth objectives.

The Up-C structure can be a powerful tool for owners of a range of businesses planning an IPO or seeking to maximize after-tax value. Here’s who should take a closer look—and why:

Partnerships and LLCs taxed as partnerships

These entities are the ideal candidates. Why? Because they already enjoy flow-through taxation, and the Up-C structure lets them keep that benefit even after going public. Owners can avoid double taxation, retain flexibility, and unlock additional value through tax basis step-ups and TRA payments. 

For partnerships with significant built-in gains, the potential tax savings—and corresponding TRA payments—can be substantial.

S corporations preparing for an IPO

While S corporations can’t directly use an Up-C structure, they can restructure before the IPO, which opens the door to the same benefits partnerships enjoy: basis step-ups, TRA monetization, and continued single-level taxation. 

Carve-outs from larger corporations

When a parent company spins off a business segment through an IPO, using an Up-C structure can enable significant basis step-ups, which translate into valuable deductions for the new public company—and TRA payments for the parent corporation.

Companies with high taxable income

The value of an Up-C structure depends on the ability to use additional deductions created by basis step-ups. Businesses projecting strong taxable income can expect to realize the greatest benefit. 

High-growth companies

Growth matters because each exchange of partnership units for PubCo shares creates a new basis step-up. Increased share price will drive an increased TRA, leading to additional cash payments to legacy owners.

An Up-C transaction involves several coordinated steps designed to preserve partnership tax benefits while creating a publicly traded entity. Here’s how it typically unfolds:

Step 1: Form the public corporation (PubCo)

A new C corporation—PubCo—is created to serve as the publicly traded entity. PubCo will raise capital through an IPO and acquire an interest in the existing operating partnership or LLC (OpCo).

Step 2: Structure ownership and exchange rights

Legacy owners retain their partnership units in OpCo rather than exchanging them all upfront. They receive exchange rights that allow them to swap units for PubCo shares over time, usually on a one-for-one basis. This flexibility lets owners control when they trigger taxable events and realize liquidity.

Step 3: Execute the IPO and initial acquisition

PubCo sells shares to the public and uses the proceeds to purchase a portion of OpCo—often 20% to 30%. For example, if OpCo is valued at $2 billion and PubCo acquires 22.5% for $450 million, that purchase creates a tax basis step-up in the acquired assets.

Step 4: Create tax basis step-ups and tax receivable agreements (TRAs)

Each acquisition or exchange of units triggers a basis step-up for PubCo, increasing depreciation and amortization deductions. These deductions reduce PubCo’s taxable income, generating real cash tax savings. Under the TRA, PubCo shares a percentage—typically 85%—of those savings with legacy owners. 

In our example, if the step-up produces $30 million in amortization deductions in year one and the tax rate is 25%, the tax savings would be $7.5 million, resulting in a $6.375 million TRA payment to owners.

Step 5: Ongoing exchanges and compounding benefits

Over time, as legacy owners exchange more units for PubCo shares, additional basis step-ups occur, creating new deductions and more TRA payments. This cycle can continue for years, often aligning with owners’ liquidity needs and tax planning strategies.

Step 6: Governance and control considerations

Legacy owners often maintain significant influence through voting rights in PubCo while maintaining direct partnership ownership. This allows them to participate in the upside of the public company while preserving certain governance rights.

TRAs are one of the most powerful features of an Up-C structure. They create a direct financial link between the tax benefits realized by the new public company (PubCo) and the legacy owners of the business. For businesses with large built-in gains, high taxable income, or significant intangible assets, these agreements can generate millions in incremental value over time—on top of the IPO proceeds.

Here’s how they work in practice:

The foundation: Tax basis step-up

When PubCo acquires partnership interests or when legacy owners exchange their units for PubCo shares, PubCo receives a step-up in the tax basis of the partnership’s assets. This step-up increases depreciation and amortization deductions, especially for intangible assets like goodwill. These deductions reduce PubCo’s taxable income, creating real cash tax savings.

The agreement: Sharing those savings

A TRA is a contractual arrangement between PubCo and the legacy owners. Under the agreement, PubCo agrees to pay the owners a percentage—typically 85%—of the actual cash tax savings it realizes from those additional deductions. 

The mechanics: Timing and calculation

TRA payments are generally made annually and are based on the actual tax savings PubCo reports. For example, if PubCo’s basis step-up generates $30 million in amortization deductions in year one and the corporate tax rate is 25%, the tax savings would be $7.5 million. 

At an 85% sharing rate, the TRA payment to legacy owners would be $6.375 million for that year. These payments continue for as long as the deductions last—often 15 years for intangible assets.

However, if PubCo does not have sufficient income to utilize the deductions, the payment is reduced to as low as zero if PubCo generated tax losses. This was a common realization for many investors that were looking at implementing Up-C and TRA transactions with special purpose acquisition company (SPAC) entities that were not forecasting profitability anytime soon.

Additional benefits: Compounding value

TRA payments are typically treated as additional purchase price for tax purposes, which can increase PubCo’s basis even further and create more deductions—leading to additional TRA payments. This compounding effect can significantly enhance the overall value delivered to legacy owners.

While the Up-C structure can unlock significant value, it’s not without complexity. It requires sophisticated planning, strong governance, and ongoing compliance. Executives should understand the following risks and operational challenges before moving forward:

Structural complexity and upfront planning

An Up-C transaction involves multiple entities, exchange rights, and contractual agreements such as tax receivable agreements (TRAs). Designing these elements requires careful coordination among tax, legal and accounting teams. Without thorough planning, the structure can become cumbersome and costly.

Ongoing compliance obligations

After the IPO, the Up-C structure demands continuous attention. Each exchange of partnership units for PubCo shares triggers tax basis adjustments, TRA calculations, and financial reporting updates. Companies must maintain robust processes to track these events accurately and comply with partnership tax rules.

Financial reporting challenges

Accounting for noncontrolling interests, deferred tax assets, and TRA liabilities adds complexity to financial statements. Avoiding unnecessary impact on earnings is key. Missteps in reporting can lead to restatements or investor concerns.

Publicly traded partnership (PTP) rules

The operating partnership must avoid classification as a publicly traded partnership taxed as a corporation. This requires careful management of ownership and trading restrictions to preserve flow-through status.

Cash flow considerations for TRA payments

TRA obligations can be substantial. While they are tied to actual tax savings, they represent real cash outflows for PubCo. Companies must model these payments and ensure they have sufficient liquidity to meet obligations without straining operations.

Market perception and investor education

Up-C structures are not new, but they remain less common than traditional IPOs, and investors may need education on how the structure works and why it benefits both the company and legacy owners. Clear communication is essential to avoid confusion or skepticism.

Tax law changes and modeling uncertainty

The value of basis step-ups and TRA payments depends on future tax rates and regulations. Legislative changes could reduce expected benefits, so companies should model multiple scenarios and understand potential downside risks.

Implementing an Up-C structure is a complex strategy that touches tax, accounting, governance, and investor relations. An experienced advisor can add significant value in several ways:

Feasibility analysis and modeling

Advisors can help you evaluate whether an Up-C structure makes sense for your business by modeling potential tax savings, TRA payments, and after-tax proceeds under different scenarios. This analysis is critical for understanding the real economic impact before committing.

Structuring and compliance

From making the section 754 election to designing exchange rights and TRA agreements, technical precision matters. Advisors ensure these elements are implemented correctly to preserve tax benefits and avoid costly missteps.

Financial reporting and investor communication

Up-C structures introduce complexities such as noncontrolling interests, deferred tax assets, and TRA liabilities. Advisors guide you through accounting requirements and help craft clear disclosures so investors understand the structure and its benefits.

Governance and long-term planning

Dual-class voting, liquidity planning, and timing of exchanges all require strategic thought. Advisors help align these decisions with your business objectives and shareholder priorities.

Navigating tax law changes and risk management

The value of an Up-C structure depends on future tax rates and regulations. Experienced advisors monitor legislative developments and help you adapt strategies to protect value over time.