Solo Brands announced that they are going to simplify their corporate structure into a more traditional one that will provide tax and reporting benefits. They used an umbrella partnership C corporation, or Up-C, structure through their IPO becuase of the tax benefits of pre-IPO shareholders.

They are going to convert Solo Brands Class B common stock into Class A shares, so they’ll just have one class of stock. They also are going to get rid of their Blocker entity that likely sits between their consolidated entiting and an operating subsidiary.

We are simplifying our corporate structure to strengthen governance and align with shareholder interests. Capping the tax receivable agreement lowers future obligations, and the simplified structure creates opportunities for efficient tax planning to support long-term value creation

John Larson, President and CEO of Solo Brands

According to the Solo Stove parent, simplification of their corporate structure will provide the following benefits to the company.

• The transactions are intended to limit material liability for cash payments that might otherwise be due in 2026 and beyond, under the terms of the TRA, as well as future distributions to redeemable noncontrolling interests.
• The transactions optimize our legal entity structure, reducing our future cash tax payments by an estimated $10 million over the next five years.
• In addition, Solo Brands expects to realize ~$0.5 million in annual savings from reduced compliance and financial reporting costs associated with having a single class of common stock outstanding.

The intricacies of an Up-C structure and a Blocker can be complex. PWC has a good article that explains more about an Up-C with a diagram. I also found a law firm that explains the use of a Blocker pretty well.

The Up-C structure is basically used as a way to give a tax benefit to pre-IPO shareholders of a company after going public. When you do a transaction, you often get something called a step-up in basis. What that means is the assets are revalued post-close, and are recorded on the balance sheet at the new (higher) value.

A company follows traditional accounting rules when they buy assets, so they may buy a piece of equipment, depreciate it for 5 years, then it has no value on the companies financials. If the piece of equipment still has useful life functionally, and value if it were to be sold or replaced, that new value is what is recorded.

That change in value, or step-up, is a benefit to the new owners of a company after a transaction because they can begin depreciation again, shielding their taxable earnings. The Up-C structure is meant to pass some of that benefit back to the original owners.

With the Blocker, that also has a tax benefit to old owners. They use them in private equity to shield gains on sale of the company that the Blocker holds.

If you own a small business with other people, at the end of the year you receive a form called a K-1 that has your share of the earnings from the company. This would then be recorded on your taxable earnings for the year.

In the case of a Blocker, it owns the operating subsidiary. The investors own the Blocker, and they don’t receive a K-1 every year where they have to basic income tax.

Similarly, when the investors sell the company, they sell the Blocker rather than the operating subsidiary. Doing this avoids paying capital gains on the sale of the asset.

I’ve seen them used in private equity, so I’m not entirely sure why Solo Brands has one. It might be from a previous owner, and they’ve just stuck with that structure. I’ve also seen complications arise when they are part of a traditional corporate structure because profit or losses from the operating company can have higher or double taxes once they flow through to the ultimate holding entity.

Unwinding them can also be difficult because if they’re purchased and an asset valuation is done, the new owners are stuck paying tax on the value of the asset to eliminate them. That may be a complication for Solo Brands through this process, but they undoubtly will see the tangible benefits they mentioned and also just an easier accounting and operational process overall.

It can take a higher level of experience and create more room for error to do accounting for all of the different entities. It also has relevance with contracting, licensing, etc. to make sure everything is at the right corporate entity. I’m sure Solo Brands’ staff will be happy to see their structure streamlined.