Ares Management LP (“Ares”) is a publicly traded investment firm that until now has been structured as a “publicly traded partnership” (“PTP”). Specifically, Ares is a Delaware limited partnership that has historically avoided being taxed as a corporation by meeting the 90% “qualifying income” exception for PTPs under Section 7704(c) of the Internal Revenue Code of 1986, as amended (the “Code”). Under the Code, a publicly traded entity is taxed as a corporation unless it meets one of a number of exceptions.In the case of Ares and other similarly situated money managers, the 90% qualifying income exception is probably the only relevant one. For these purposes, “qualifying income” includes dividends, interest, capital gains, certain income related to natural resources and other categories of investment income. Meeting the exception allows these firms to avoid being classified as a C corporation and the entity-level taxes that would result from that classification.

The recent U.S. tax reform legislation, commonly referred to as the Tax Cuts and Jobs Act (the “Act”) reduced the corporate tax rate from 35% to 21% among a host of other changes. This change, when considered together with the fact that the preferential capital gains and qualified dividend rates were not modified, has caused U.S. business owners to re-evaluate whether the pass-through structure (to this point the most common among privately held entities and businesses) is truly the most advantageous tax structure for them. On February 15, 2018, Ares issued a press release announcing that, effective March 1, 2018, it has elected to be taxed as a corporation for U.S. federal income tax purposes.Ares executives cited several factors supporting their decision to “incorporate.” In particular, the CFO stated that the election “will simplify our structure, broaden our potential investor base, improve our liquidity and trading volume and provide a more attractive currency for strategic acquisitions.” Eligibility for inclusion in the S&P 500 is itself an important factor, as is the elimination of the complexity of K-1 reporting (which will now be replaced with the more common 1099-DIV reporting to public shareholders). Certain categories of foreign investors who typically avoid investments in flow-through structures may also now consider an investment in Ares. Initial market reaction was overwhelmingly positive, with the trading price of Ares common units jumping over 14% following the announcement.

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