Page 49 - Initial Public Offering - An Introduction to IPO on Wall Street

voting and monetary shares in the registrant and at the time of the intended exit, they sell the
shares to the public.

The public sector usually pays tax on its profits, and shareholders in the U.S pay tax on the
company's selling of the stock and dividends, leading to two rates of tax. In general, the
financial activities related to the IPO should be taxable only for the proceeds generated. Some
transactions can, however, lead to benefits that could be postponed in an alternative framework.

For businesses that are classified for tax purposes as flow-through corporations, there is
typically no business level tax payable. The organization’s earnings flow directly to the owners,
and dividends are usually non-taxable, culminating in a single amount of tax only at the owner
amount.

Thus, a corporation currently viewed as a flow-through organization and considering an IPO
may want to explore alternative arrangements that tend to provide shareholders with flow-
through tax advantages.

Based on the tax law provisions, the advantages of certain alternative schemes are restricted to
particular sectors (e.g. master limited partnerships, real estate investment trusts, etc.) An
alternate framework, the Up-C structure, does, however, offer substantial tax and financial
advantages to pre-IPO shareholders in any industry.

The public usually invests in a newly established company (PubCo) in an Up-C IPO
arrangement that utilizes the IPO funds to gain a stake in a partnership. Any financial interests
preserved by pre-IPO shareholders remains in the partnership. The following advantages are
provided by the Up-C framework:

Public markets and flow-through structure accessibility—the arrangement enables
previous owners in any sector to maintain the tax advantages of a flow-through investment,

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