UBTI Blocker

A UBTI Blocker is a corporate entity (typically a C-corporation) specifically structured to prevent Unrelated Business Taxable Income from flowing through to tax-exempt limited partners such as endowments, foundations, pension funds, and IRAs. UBTI arises when a tax-exempt organization earns income from a trade or business that is not substantially related to its exempt purpose. In the venture context, UBTI can be generated by debt-financed investments (income from leveraged buyouts or real estate), direct operation of portfolio businesses, and certain partnership allocations. Without a UBTI blocker, these income streams would flow through the fund's partnership structure and create tax liability for tax-exempt investors who would otherwise owe nothing. The blocker pays corporate income tax on the UBTI-generating income, which is generally more favorable than the tax-exempt entity paying UBTI tax directly (which would be at trust tax rates with a low threshold). The cost of the blocker (formation, annual compliance, corporate tax) is typically borne by the investors who benefit from it.