What Is the UP-C Structure and How Does It Work?

A UP-C (Upstairs-C Corporation) structure allows partnerships to go public while preserving tax benefits for existing owners. It enables pre-IPO investors, such as founders or private equity firms, to access public markets through a newly formed C corporation while maintaining tax advantages. This approach is popular among companies with pass-through taxation structures seeking capital without immediately sacrificing tax efficiencies.

This setup introduces unique tax, governance, and investor rights considerations that differ from traditional IPOs. Understanding these elements helps assess the benefits and complexities of using a UP-C structure.

Entity Creation and Ownership

A UP-C structure begins with forming a new C corporation to serve as the publicly traded entity. Instead of directly owning the partnership’s assets or operations, this corporation acquires an equity interest in the partnership, typically in exchange for cash raised from the IPO. This allows the partnership to continue operating as a pass-through entity while public shareholders invest in the C corporation, which derives its value from its stake in the partnership.

Pre-IPO investors, including founders and early backers, retain their economic interests in the partnership by holding exchangeable units. These units provide tax and liquidity advantages, allowing holders to defer capital gains taxes until they convert their partnership interests into publicly traded stock. Public investors own shares in the C corporation, which holds an interest in the partnership.

To compensate pre-IPO investors for the tax attributes they forgo when converting their partnership units into corporate shares, the C corporation typically enters into a tax receivable agreement (TRA) with them. Under this agreement, original owners receive a percentage—often 85%—of the tax savings generated by the corporation from the step-up in tax basis. This enhances financial returns for early investors while making the structure more attractive.

Tax Pass-Through Considerations

A key advantage of the UP-C structure is its ability to preserve the tax benefits of a pass-through entity while accessing public capital. Unlike a traditional C corporation, which faces double taxation—once at the corporate level (21% federal tax rate as of 2024) and again on dividends—an operating partnership in a UP-C structure is taxed only at the individual level. Pre-IPO owners who hold partnership units report income, deductions, and credits on their personal tax returns rather than being subject to corporate taxation.

To meet its tax obligations, the C corporation relies on periodic cash distributions from the partnership. These distributions must be structured carefully to account for differences in tax rates between the corporation and individual partners, particularly when state and local taxes vary. Poorly managed distributions can create liquidity issues if taxable income does not align with available cash flow.

The TRA further complicates tax planning. When pre-IPO owners exchange their partnership units for corporate shares, the corporation benefits from a step-up in tax basis, leading to increased depreciation and amortization deductions. While this reduces taxable income, the TRA requires the corporation to share a portion of these tax savings—typically 85%—with the original owners. This creates an ongoing liability that must be accounted for in financial reporting and cash flow management. Failure to meet TRA payments could lead to disputes or financial strain.

Governance and Voting

The governance structure of a UP-C arrangement balances control between pre-IPO owners and public shareholders while ensuring efficient management of the operating partnership. Public investors hold stock in the newly formed C corporation, which is listed on an exchange. However, decision-making power often remains with the original owners, who continue to control the partnership.

To maintain control, pre-IPO owners often receive Class B shares in the C corporation, which carry multiple votes per share, while public investors hold Class A shares with standard voting rights. This dual-class structure allows the founding group to retain influence over corporate decisions, including board appointments and mergers, even if they hold a minority economic interest. The Securities and Exchange Commission (SEC) and major stock exchanges require disclosures regarding these governance structures to ensure transparency for investors.

Board composition is another important factor. While the C corporation’s board has fiduciary duties to public shareholders, its ability to direct the partnership’s operations is often limited by contractual agreements, such as a limited liability company (LLC) or partnership agreement. These agreements may grant the founding group authority over major business decisions, reducing the board’s practical power.

Public Offering Path

Going public under a UP-C structure requires careful coordination to meet regulatory requirements while preserving tax and economic benefits. Unlike a standard IPO, where a single C corporation issues shares directly to the public, a UP-C structure involves a newly formed C corporation raising capital and using the proceeds to acquire an interest in the existing partnership. This introduces unique financial reporting and disclosure obligations.

From an accounting perspective, the C corporation must consolidate the partnership’s financial statements under ASC 810 if it holds a controlling financial interest. This requires assessing whether the corporation qualifies as the primary beneficiary under variable interest entity (VIE) rules, which can impact reported earnings and balance sheet presentation. Additionally, the corporation must disclose the TRA as a liability under ASC 450, as it represents a future obligation tied to tax benefits realized upon unit exchanges. Investors rely on these disclosures to evaluate the TRA’s long-term financial impact.

Investor Redemption or Exchange

A defining feature of the UP-C structure is the ability of pre-IPO owners to exchange their partnership units for shares in the publicly traded C corporation. This provides liquidity but also triggers tax and financial implications that must be managed. Agreements specify the timing, terms, and conversion ratios to ensure a structured transition from private ownership to public equity participation.

Typically, original investors can convert their partnership units into Class A shares of the C corporation on a one-for-one basis. These exchanges are often subject to lock-up periods to prevent immediate sales after the IPO, helping maintain market stability. The conversion triggers a taxable event for the original owners, as they recognize capital gains based on the difference between their initial basis in the partnership units and the fair market value of the corporate shares received. The corporation benefits from this exchange through a step-up in tax basis, which enhances future tax deductions.

Beyond tax considerations, the redemption or exchange process affects corporate governance and stock liquidity. As more original owners convert their units, the public float of the C corporation increases, improving trading volume and reducing volatility. However, large-scale exchanges can dilute existing shareholders, particularly if the corporation issues new shares instead of using cash for redemptions. Some companies implement structured redemption programs to limit the number of units exchanged within a given period, balancing liquidity needs with shareholder value preservation.