Master Limited Partnership


In the United States, a master limited partnership is a limited partnership that is publicly traded, also known as a publicly traded partnership. It combines the tax benefits of a limited partnership with the liquidity of publicly traded securities.

Master Limited Partnership

What is MLP?

By definition, a master limited partnership is a limited partnership that is publicly traded. MLP’s are usually operational in the field of natural resources, real estate industries, and the financial services. MLP’s brings together the tax benefits under limited partnership along with the liquidity of securities that are publicly traded.

How does MLP work?

MLP is not considered as a single entity. It is deemed as the total of partners that are allowed for a ‘pass through’ income. This means, that MLP’s are not liable to any corporate taxes. Each owner or partner is personally responsible for taxes, on their specific portions of the gains, losses, deductions and incomes of the newly formed MLP. This is an advantage for the owners as it sheds off any ‘double taxation’ that otherwise are applied for corporations.

Under MLP’s distributions are made on a quarterly basis, and are similar to dividends in their characteristics. However, MLP does not guarantee cash distributions; the unit holder is liable to pay taxes on their income proportion.

MLP units can be purchased from brokers, where a unit holder’s tax will be based on the amount paid for the units, initially. With each distribution or losses, the basis will fall, while it will increase with each income allocation. However, a percentage or portion of certain distributions can act as returns on the investor’s capital, which can reduce a unit holder’s basis for taxes.

Overall, when MLP pays more in terms of distribution than it would earn from taxable incomes, then this would reduce the unit holders tax basis in terms of the difference that is between the cash received and the taxable income of the MLP’s. Also, if the unit holder sells off the units owned, then any gain from the sale will be taxed on the unit holder’s income tax rate (ordinary income tax rate).

MLP: How it matters?

First, the fact that MLP are not subjected to income tax brings good news for partners/investors as it leaves more cash that can be used for distributions. This makes MLP units attractive when compared to shares of corporations that are of similar nature.

Investors should bear in mind to evaluate the MLP’s effectiveness, if it is able to meet the present distribution and if it will be sustainable in the future.

Further Reading

  • Corporate characteristics associated with master limited partnership formation – [PDF]
  • Contracts between managers and investors: a study of master limited partnership agreements – [PDF]
  • Price performance of initial public offerings of master limited partnership units – [PDF]
  • Equity valuation effects of forming master limited partnerships – [PDF]
  • Taxes and organizational form: A comparison of corporations and master limited partnerships – [PDF]
  • Shareholders' wealth and organizational restructuring: are real estate master limited partnerships different? – [PDF]
  • Changes in organizational structure and shareholder wealth: the case of limited partnerships – [PDF]
  • Valuation consequences of master limited partnership formation – [PDF]
  • Smarter finance for cleaner energy: Open up master limited partnerships (MLPs) and real estate investment trusts (REITs) to renewable energy investment – [PDF]
  • Master limited partnerships shed a tier – [PDF]