Up-C IPOs and Tax Receivable Agreements Explained

Introduction

Most companies that go public are already corporations: they sell new shares, list them, and the tax position of the business barely changes. Companies owned through a partnership or LLC have a choice. They can convert into a corporation before the listing, or they can keep the partnership and put a new corporation on top of it, the arrangement known as an Up-C.

The second route is common for sponsor-backed and founder-owned businesses organized as LLCs: GoDaddy and Shake Shack listed this way in 2015, and Medline, majority-owned by funds of Blackstone, Carlyle and Hellman & Friedman, did so in 2025. What makes it worth understanding is the contract that comes with it. A tax receivable agreement (TRA) pays the pre-IPO owners most of the tax savings their later share sales create, for 15 years or more, whether or not they still own any stock; Medline's prospectus put that stream at roughly $9 billion if every unit were exchanged at the IPO price.

The sections below cover how the structure works, where the tax basis step-up comes from, how TRA payments are sized, why a change of control turns them into one lump sum, and how bankers handle the liability in a valuation or a take-private.

The cleanest way to see what the Up-C changes is to set it against the ordinary listing described in the step-by-step IPO process. The marketing, the roadshow and the pricing are identical; the ownership plumbing and the tax result are not.

The last row is the one analysts get wrong most often, and it comes back in the valuation section.

The Holding Company and the Operating LLC

Before the IPO, the business sits in an LLC taxed as a partnership: it pays no entity-level income tax, and its profit is taxed directly to its members. At the IPO, the owners form a new corporation, usually called PubCo, whose only significant asset will be units in that LLC. PubCo sells Class A shares to the public and uses the cash to buy LLC units, either newly issued (funding the business) or from existing owners (funding their exit).

Up-C (Umbrella Partnership C Corporation)

An IPO structure in which public investors buy shares of a newly formed corporation whose main asset is an interest in an existing operating partnership or LLC. Pre-IPO owners keep their partnership units, usually with voting shares in the corporation, and can exchange those units for listed shares over time. The name comes from the umbrella partnership REIT (UPREIT) structure it was modeled on.

PubCo becomes the managing member of the LLC, so it controls the business and consolidates it in its financial statements. The units PubCo does not own show up as noncontrolling interest, which is simply the pre-IPO owners' remaining stake in the operating company.

Class B Shares, LLC Units and Exchange Rights

The pre-IPO owners keep their units and receive Class B shares in PubCo, typically one per unit. Class B shares carry votes but no economic rights, which lets the owners vote alongside public holders even though their economics sit one level down in the LLC. Medline's prospectus describes exactly this: its continuing unitholders hold all of the Class B stock, and their units are exchangeable for Class A shares one for one.

The exchange right is the owners' route to liquidity. To sell, an owner hands a unit (and its Class B share, which is cancelled) to PubCo and receives a Class A share, or sometimes cash, then sells that share in the market. Every exchange moves one more unit from the noncontrolling interest into PubCo.

What Happens When Units Are Exchanged

An exchange is a taxable sale by the owner to PubCo. The owner pays tax on the gain, and PubCo acquires the unit with a tax basis equal to its value on that day. Because the LLC has a Section 754 election in place, PubCo's share of the LLC's own asset basis is adjusted upward under Section 743(b) to match what it paid. Much of that basis step-up lands on goodwill and other intangibles, which are amortized for tax over 15 years under Section 197, so larger deductions cut PubCo's cash taxes for years.

This is the same economic prize that drives the stock versus asset debate in how M&A tax structures decide who gets a step-up. In a normal stock IPO no step-up ever happens. In an Up-C, one happens every time an owner sells, and the deductions belong to PubCo.

A Worked Example With Round Numbers

Take a PubCo with 100 million units outstanding in its LLC after the IPO: PubCo holds 40 million, and the sponsor and founder hold 30 million each. Shortly after the lockup ends, the sponsor exchanges its 30 million units and sells the shares at $20, so PubCo acquires units worth $600 million. Assume the LLC's existing basis attributable to those units is close to zero, the entire step-up is amortizable over 15 years, and the combined tax rate is 25%.

The 85/15 Convention

The tax receivable agreement is a contract between PubCo and the pre-IPO owners, signed at the IPO. It covers the step-ups from exchanges and, in many agreements, other tax attributes the owners brought with them, such as pre-IPO losses or the basis of entities merged into PubCo.

Tax Receivable Agreement (TRA)

A contract under which a newly public company pays its pre-IPO owners a fixed percentage, most often 85%, of the cash tax savings it actually realizes from tax attributes created by the IPO structure, mainly basis step-ups from exchanges. Payments usually run for 15 years or more after each exchange and do not depend on the owners still holding shares.

The market convention is 85% to the owners and 15% retained by PubCo, a split that leaves the company a cushion if its tax position changes. Shake Shack's agreement, effective February 4, 2015, pays 85% of the benefits it actually realizes and lets the company keep the remaining 15%. The split is negotiated, though: Medline's agreement pays 90%, with an estimated aggregate liability of about $8,975 million, generally payable over 15 years, if every unit were exchanged at the $29 IPO price and the 25.7% corporate tax rate assumed in the prospectus held.

Payments Follow Realized Savings, Not Ownership

Three features of the contract matter more than the headline percentage:

On the balance sheet, most issuers record the TRA as a contingent liability under ASC 450 at the undiscounted amount of payments they consider probable, alongside a deferred tax asset for the step-up itself, the kind of asset explained in how deferred tax assets and liabilities work. The recorded amount covers only exchanges that have already happened, so it can sit far below the full-exchange estimate in the prospectus.

Up-C structures connect IPO mechanics, tax and valuation in one question: The 160-page PDF covers the accounting, enterprise value and transaction frameworks behind questions like these, access the IB Interview Guide and build the foundations an Up-C answer rests on.

What Triggers Acceleration

Every TRA lets the payment stream collapse into one early termination payment. The usual triggers are PubCo electing to terminate, a material breach (often including late payments), and a change of control. On any of them, the contract stops waiting for real tax savings and pays the present value of the savings it assumes will arise.

Early Termination Payment

A lump sum due to tax receivable agreement holders when the company terminates the agreement, breaches it or undergoes a change of control. It equals the present value of all future TRA payments, calculated on assumptions set in the contract: typically that the company will have enough taxable income to use every deduction and that any units not yet exchanged are exchanged at the deal price.

Those assumptions do the work. Medline's prospectus warns that in certain changes of control, units not yet exchanged are deemed exchanged at market value and that payments could exceed 90% of the cash tax benefits it actually realizes. The discount rate is set by formula; a common formula in agreements from the LIBOR era was the lesser of 6.5% and LIBOR plus 100 basis points, low for a stream that depends on a company's future profits.

Sizing the Payment in a Take-Private

Return to the example. Five years after the exchange, a buyer agrees to acquire PubCo at $30 per share. Ten $8.5 million payments remain on the sponsor's exchanged units, and under the deemed exchange assumption the founder's 30 million units still in the LLC count as exchanged at $30: a $900 million step-up worth $12.75 million a year for 15 years at the same 25% rate and 85% share. Assuming full utilization and discounting at 6.5%:

The buyer pays $3 billion for the 100 million units and owes about $181 million more to TRA holders at closing, roughly $1.80 per share or 6% of the equity price.

TRAs at the Negotiating Table

Because the payment comes out of the same pot as the price per share, TRA holders and public shareholders compete directly in a sale, a point worth adding to the take-private process checklist. Paya Holdings, which carried a TRA with its former private equity owner GTCR after going public through a 2020 SPAC merger, shows the trade in Nuvei's 2023 tender offer documents. According to the background of the offer filed with the SEC, Nuvei offered $9.50 per share in December 2022 and said it would go to $9.70 if the TRA parties waived their early termination payment. Paya's board countered at $9.75 with no waiver condition, the merger agreement was signed at that price, and the TRA was to be terminated for an early termination payment of about $19.5 million.

Outside a sale, companies sometimes negotiate a voluntary buyout of the agreement. GoDaddy, which listed as an Up-C in 2015, agreed in 2020 to settle all of its TRAs with KKR, Silver Lake, TCV and founder Bob Parsons's entity for a single $850 million payment, funded with cash and borrowing. Its earnings release announcing the settlement said the deal would eliminate an estimated $1 billion of tax-related payments through 2028, and more thereafter.

Count Shares on a Fully Exchanged Basis

An Up-C's market capitalization is not Class A shares times the share price. The economic share count is Class A shares plus every LLC unit held outside PubCo, since each unit can become a Class A share at any time. At the IPO in the example, valuing only PubCo's 40 million Class A shares at $20 would show equity value of $800 million for a business whose equity is worth $2 billion.

The TRA Liability as a Debt-Like Item

The TRA is a contractual cash claim that ranks ahead of common shareholders and accelerates on a sale, so most bankers treat it as one of the debt-like items in the enterprise value bridge, alongside the pensions and preferred stock covered in what counts as net debt. Two adjustments make the number meaningful:

Avoiding Double Counting in a DCF

The step-up and the TRA are two halves of one item, and a model should capture both exactly once. If projected cash taxes already reflect the step-up deductions, subtract the present value of TRA payments as a debt-like item; the business keeps the 15%. If the DCF uses a normalized tax rate that ignores the step-up, leave out both the TRA and the tax benefit, or add only the present value of the retained slice. Taking the full tax benefit without the 85% claim against it overstates equity value.

In trading comps, data providers do not apply one consistent TRA treatment, so consistency across the peer set matters more than the choice itself. In a take-private, the early termination payment appears as its own line in the uses of funds.

TRA liabilities test the same enterprise value bridge logic as leases and pensions: Work through equity value, net debt and IPO questions with worked answers, start practicing interview questions for free and make the Up-C share count automatic before a technical interview.

The Case For

For owners of a partnership, the Up-C stacks several benefits:

Defenders add that public investors lose nothing they would otherwise have had, since a conventional corporate IPO creates no step-up at all, and the 15% they keep is pure upside. Research summarized on the Harvard Law School Forum on Corporate Governance by accounting professors Alexander Edwards, Michelle Hutchens and Sonja Olhoft Rego found that IPOs with these agreements priced higher and went on to report stronger earnings, cash flow and return on assets than traditional IPOs, consistent with the TRA acting as a positive signal rather than a transfer from naive investors.

The Case Against

Critics focus on governance and incentives. Insiders who negotiated the agreement before the listing keep collecting after they have sold out, and they often sit on the board that would approve a sale. The change-of-control acceleration puts a price on any takeover that is paid to them before shareholders see a dollar, computed on assumptions that may never hold. A board weighing a bid, as Paya's did, has to judge whether the acceleration is a fair contractual right or a toll on the deal, and the liability's complexity makes it easy for a generalist investor to underweight.

The Up-C exists because of a tax asymmetry: a partnership can hand its buyer a basis step-up and a corporation cannot. The structure keeps the partnership alive long enough for that step-up to be created, one exchange at a time, and the tax receivable agreement decides that most of its value goes back to the people who sold.

For a public investor, that turns the TRA into a long-dated claim ranking ahead of the common stock. For a buyer, it becomes a closing payment computed on assumptions it did not choose, which is why it surfaces in take-private negotiations and price-per-share debates.

For a candidate, the topic rewards following one detail all the way through: from the organizational chart to the share count, from the tax line to the enterprise value bridge, and from there to the uses of funds in a sale.