Equity Investments in Pass-Through Entities: Investment Structures, Tax Ramifications

Financing of LLCs and LPs by Private Equity, Venture Capital, and Angel Investors

Note: CPE credit is not offered on this program

Recording of a 90-minute premium CLE webinar with Q&A

Conducted on Wednesday, July 10, 2019

Recorded event now available

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Program Materials

This CLE webinar will discuss the principle tax ramifications of equity investments in limited liability companies (LLCs) and limited partnerships (LPs) by private equity, venture capital, and angel investment funds.

Description

Historically, most private investment fund investment activity has been focused on C corporations. However, given the tax advantages and flexibility afforded LLCs and LPs, the past two decades have seen an increasing level of private investment fund investments in these entities.

Although the tax benefits of pass-through entities can add significant value to an investment, there are also unique tax considerations (and potential pitfalls) that investors must consider. Investors must also understand their rights and obligations as well as those of managing partners and other investors under the governing documents.

Listen as our authoritative panel of practitioners discusses legal issues in investing in pass-through entities, advantages and disadvantages of LLCs as portfolio companies, various entity investment structures, and tax ramifications of equity investments.

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Outline

  1. Advantages and disadvantages of LLCs and LPs as portfolio companies
    1. Basis step-up (cash flow benefits and exit value)
    2. Tax-free leveraged recaps
    3. Outside basis adjustments
    4. Qualified Business Income Deduction
    5. Pre-Tax IRR
    6. Comparison to Corporations
      1. Corporate income tax rate
      2. Qualified Small Business Stock
  2. Special tax issues
    1. Considerations of tax-exempt and foreign investors
    2. Basis step-up
      1. 743(b) adjustments
      2. 704(c) basis step-up for growth equity investments
      3. Avoiding the anti-churning rules
    3. Profits interests
    4. Negotiating tax distributions
  3. Greater flexibility in establishing rights of minority equity holders

Benefits

The panel will review these and other noteworthy issues:

  • Considering the pros and cons of investing in pass-through entities
  • Choosing the appropriate investment structure
  • Understanding recent IRS regulations on noncompensatory options and convertible debt
  • Negotiating tax distributions for preferred equity investments
  • Greater flexibility in establishing rights of minority equity holders

Faculty

Cohen, Steven
Steven M. Cohen
Partner
Morgan, Lewis & Bockius

Chair of the firm’s emerging business and technology practice, Mr. Cohen represents entrepreneurs, private equity...  |  Read More

Spiro, Michael
Michael P. Spiro
Partner
Finn Dixon & Herling

Mr. Spiro chairs the firm's Tax group, where his practice focuses on providing federal and state tax...  |  Read More

Zarin, Richard
Richard S. Zarin
Partner
Morgan Lewis

Mr. Zarin provides counseling on tax matters involving international and domestic transactions, including mergers and...  |  Read More

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