Tax Me Once

For technology and other startups, going public can be doubly taxing—literally.

"Traditionally, a pre-IPO company is structured as a C corporation, which is legally subject to two tax layers, the first assessed on income earned by the entity, and then on shareholders when selling stock or receiving dividends," says Morrison & Foerster tax partner Remmelt Reigersman. "Setting up initially as a limited liability company or other entity treated as a partnership for tax purposes keeps it to one layer—as a pass-through, the entity is not taxed—except that when it comes time to go public, the partnership is generally treated as a corporation and taxed accordingly."

While this may appear unavoidable, an innovative technique known as "Up-C" leverages the LLC advantage to help pre-IPO companies achieve significant tax savings and favorable deal economics while preserving control for the founding partners.