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Definition of Unrelated Business Taxable Income (UBTI)

Unrelated business taxable income ("UBTI") is income that a tax-exempt organization earns that is unrelated to the tax-exempt purpose of the organization. The primary relevance of UBTI in the startup ecosystem, is that it effectively prevents venture capital funds from investing in startups structured as pass-through entities, e.g., LLCs taxed as partnerships. The reason for this is that many LPs in VC funds are themselves tax-exempt organizations (e.g., pension funds, university endowments, foundations), and these organizations can't receive UBTI that flows through an LLC to its owns without jeopardizing their tax-exempt status.