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A company that is considering going public has a long road ahead filled with decisions. When the business is structured as a partnership,1 historically, it has been assumed that the partnership needs to become a corporate entity before the initial public offering (IPO). However, businesses operating as partnerships can take an alternate route to that destination that may yield significantly more value: the Up-C partnership structure.
The Up-C partnership structure is often overlooked, but it may be a highly advantageous path to an IPO in the right situation. The existing partners may defer recognizing taxable gain and increase their total consideration received on future disposition of partnership units by creating certain tax attributes and subsequently monetizing the associated benefits in the form of cash received as the tax attributes are used.
This two-part article describes the Up-C structure and its implementation and uses, especially as it relates to a planned IPO. This first part covers the Up-C s basic structure and how it is implemented, contrasting it to a conventional conversion of a partnership to a C corporation and showing how a tax receivable agreement (TRA) coupled with an Up-C can provide even greater value to the original partners (legacy partners). Next month, Part 2 will analyze a wide range of tax considerations that can come into play before, during, and after implementing an Up-C structure with a TRA.
Many advisers and business owners take for granted that a partnership must first convert to a C corporation as part of any pre-IPO planning. A pre-IPO conversion of a partnership into a corporation is typically accomplished via one of the following methods described in Rev. Rui. 84-111:
1. The partnership may contribute its assets to the corporation in exchange for stock of the corporation and then distribute the stock to its partners in liquidation (an "assets over" form);
2. The partnership may liquidate, distributing undivided interests in its assets and liabilities to its partners, who then contribute their undivided interests to the corporation for stock (an "assets up" form);
3. The partners may contribute their partnership interests to the corporation in exchange for stock (an "interests over" form); or
4. The contribution may be "formless" under applicable state statutes. Note that this type of transaction,...