Chamberlain Hrdlicka Blawgs
The growing use of the “Up-C” structure for business ventures which seek access to greater amounts of capital, such as through a public offering, has been discussed at various tax forums and discussed in several articles on the subject over the past five years or more. The Up-C umbrella partnership is being used by private equity funds as well as other venture funds with respect to current and future public offerings. It provides a private equity or VC fund organized as a partnership to continue to enjoy flow through income tax treatment while retaining a degree of control of the business operations and further provide a cash-out of investor fund option through a structured redemption or through a similar call right.
In a typical UP-C structure, a regular or C corporation is owned by a partnership or limited liability company (“LLC”). The LLC is owned partially by the C corporation (public company) and in part by the historica investors such as individuals, venture capital or private equity funds. The investors are issued “exchange rights” permitting them to periodically cause their equity positions redeemed for equivalent value shares of stock in the parent C corporation. The exchanges are taxable to the investors which can obtain a basis step-up in pro rata portion of the LLC’s assets provided a section 754 election is made by the LLC. This in turn will reduce the C corporation’s future taxable income which benefit is transferred in part to the investors through tax receivable agreement. The C corporation generally is permitted to enjoy a large portion of the tax savings realized by the corporation either during the formation of the UP-C structure or through a subsequent event (for example, the tax basis step-up from the purchase of partnership units from a historical owner exercising its exchange right). With the reduction in the corporate income tax rate to 21% under the TCJA, the UP-C umbrella partnership may gain further use. It has been reported that companies that have used the UP-C partnership include GoDaddy, Spirit Airlines and Planet Fitness.
In the Up-C structure, the business conducted in partnership form, organizes a C corporation and uses that entity to raise capital through a public offering either through a US stock exchange or a foreign exchange such as in Canada. The C corporation then contributes the capital from the raise to the operating partnership in exchange for interests in the operating partnership(s). What these steps have accomplished is that the PE of VC fund now has a publicly traded entity that has raised substantial funds to expand the business operations of the operating partnership or partnerships. Effectively, the C corporation public company has taken on part ownership of the operating partnership(s) and in many instances may be the managing member of the operating partnership or LLC. The value enhancement through fund growth inures to both the historical investors and the public investors.
The historical partners will continue to enjoy single level taxation on their direct ownership share of the operating partnership(s) profits. Subsequently the historical partners will have the right to exchange their partnership interests for stock in the public company (Up-C).
There are a host of tax issues generated by the UP-C as well as a fair amount of securities law compliance, contractual issues and of course governance issues and questions. In a future post some of the tax issues associated with the use of the UP-C will be addressed.
 See Polsky and Rosenszweig, “The UP-C Revolution”, 71 Tax L. Rev. 415 (Winter 2018); DeSalvo, “The Staying Power of the UP-C: It’s Not Just a Flash in the Pan”, Tax Notes (8/8/2016); “The Evolution of the UP-C”, Tax Notes (10/22/2018); Brown, “The UP-C IPO and Tax Receivable Agreements: Legal Loophole?, 156 Tax Notes 859 (8/14/2017)