Considering an IPO? Here’s why an Up-C might be advantageous

Observations from the front lines


An initial public offering (IPO) is a milestone for any company seeking growth. An IPO offers a company liquidity for its owners, an ability to more easily raise capital to support future growth, and enhanced reputation. However, for pass-through entities, the benefits of an IPO have required such entities to forfeit the economic and tax benefits of operating as a partnership, or other type of pass-through entity. An umbrella partnership C corporation (Up-C) structure allows a pass-through entity the best of both worlds, achieving preferential tax treatment for both the pre-IPO investors and the new publicly-traded corporation, while also enjoying access to the capital markets.

Over the past few decades, the popularity of Up-C structures as a means to access capital markets for companies contemplating an IPO has significantly increased. An Up-C structure can be utilized by companies across all industries and sectors, but is particularly common for private equity portfolio companies.

Up-C analysis

Common advantages of an Up-C structure

  • Provides access to public markets via a publicly-traded corporation, while retaining the tax benefits of a pass-through structure.
  • Pre-IPO investors can receive significant incremental proceeds on exit by implementing a tax receivable agreement (TRA).
  • Creates additional liquidity for pre-IPO investors by granting them the right to exchange their interests in the operating entity for common stock in the publicly-traded company.
  • Pre-IPO investors retain control of the consolidated operations of the company through a controlling percentage of voting shares in the publicly-traded company (which typically has sole operational control of the pass-through operating entity).
  • Pre-IPO investors enjoy continued access to tax distributions from the pass-through operating entity and avoid double-taxation.

How it works

In the accompanying example, the operating pass-through entity first “unitizes” its interests so that each unit has the same economic rights. Then in conjunction with the IPO, PubCo typically issues two classes of common stock:

  • Class A common stock is issued to public investors and carries a majority of the economic rights (typically mirroring the operating pass-through entity) and a small percentage of voting rights in PubCo. The economics typically mirror the economics associated with each unit in the operating pass-through entity.
  • Class B common stock is issued to the pre-IPO investors and carries voting rights in PubCo only.

As a result of the IPO, the pre-IPO investors may either retain their interests in the operating pass-through entity, or choose to liquidate their investment. To do so, the pre-IPO investors may either elect to redeem a portion of their interests for cash raised in the IPO, or to exchange those interests for public-traded PubCo Class A common stock.

To affect potential future redemptions and exchanges, the pre-IPO investors and PubCo typically enter into two agreements:

  1. The pre-IPO investors may exchange remaining operating entity units for PubCo stock or cash (typically at PubCo’s option). 
  2. A TRA may provide that a percentage of any tax benefit derived by PubCo resulting from the Up-C structure to be shared with the pre-IPO investors as additional consideration for the interests they sell in the business.
Post-IPO structure

Typical post IPO structure

Planning to avoid potential complexities

Like a traditional IPO, an Up-C structure carries a variety of accounting and tax complexities and associated administrative burdens that are unique to the structure. Such considerations typically require support and advice from individuals who specialize in these fields and may also require ongoing record-keeping and maintenance.

Accounting and financial reporting complexities

  • PubCo must determine whether or not it should consolidate the operating entity. 
  • PubCo must evaluate whether the transfer of control of the operating entity to PubCo triggers purchase accounting requiring a step-up in basis of assets and liabilities. 
  • In conjunction with the capitalization of PubCo, the company is typically required to recognize noncontrolling interests (NCIs), comprised of the pre-IPO investors residual interests in the pass-through operating entity. The measurement and classification of NCI can be complicated depending upon the terms and conditions of the exchange agreement and/or any redemption features.
  • PubCo must evaluate the impacts of any restructuring of stock-based compensation awards and the issuance of new or replacement awards in connection with the IPO.
  • As a direct result of its capital structure, the computation and presentation of earnings per share requires detailed analysis of participation and redemption rights.
  • Up-C IPOs often require S-X Article 11 pro forma financial statements. This is generally due to the material impacts of the change in organizational structure, use of proceeds to repay pre-IPO investors interests in the operating entity, and the formation of the TRA.

Tax complexities

  • The company must determine the timing and recognition of a deferred tax asset associated with the tax basis step-up adjustments created through the exchange by pre-IPO investors of units in the operating pass-through entity for shares of PubCo.
  • The company must assess the probability of TRA payments, whether (and when) the TRA liability should be recognized, and how the TRA liability should be measured.
  • The company must maintain detailed records tracking each exchange by the pre-IPO investors. The timing of the exchanges affect both the payments made under the tax receivable agreement and also how the operating pass-through entity allocates income and loss.
  • The company must calculate and track tax basis adjustments on the exchange of units in the operating pass-through entity.
  • Any additional compensation cost recognized upon the accelerated vesting of awards or payment of additional bonuses may be subject to excise tax as a non-qualified deferred compensation plan.
  • The continued existence of the operating pass-through entity requires the maintenance of partner capital accounts and other accounting functions not required in a corporate context.

The bottom line

An Up-C structure can provide substantial benefits to any organization pursuing an IPO. Companies should carefully weigh the potential benefits and burdens when selecting an optimal IPO structure for their exit, and begin planning well in advance of their IPO. Key stakeholders should be identified early in the restructuring process and companies should evaluate the resources needed to meet the demands of maintaining a corporate and pass-through structure as well as compliance with SEC requirements.

Contact your PwC advisor for more information and to discuss in an Up-C structure might be appropriate for your organization.

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Mike Bellin

Partner, Consulting Solutions, US IPO Co-leader, PwC US

Craig Gerson

Principal, M&A Tax, PwC US

Jennifer Wyatt

Tax Partner, PwC US

Lauren Bisanz

Deals Senior Manager, PwC US

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