BROWSE

Master Limited Partnership

Definition

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.

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
search.proquest.com [PDF]
… DEBT sub i = (LTD + N/P)/(LTD N/P + stockholders equity) for firm i. e sub i = the residual … 1986. The master limited partnership: An alternative to the corporation … Guenther, D. 1992. Taxes and organizational form: A comparison of corporations and master limited partnerships …

Contracts between managers and investors: a study of master limited partnership agreementsContracts between managers and investors: a study of master limited partnership agreements
www.sciencedirect.com [PDF]
… DEBT sub i = (LTD + N/P)/(LTD N/P + stockholders equity) for firm i. e sub i = the residual … 1986. The master limited partnership: An alternative to the corporation … Guenther, D. 1992. Taxes and organizational form: A comparison of corporations and master limited partnerships …

Price performance of initial public offerings of master limited partnership unitsPrice performance of initial public offerings of master limited partnership units
onlinelibrary.wiley.com [PDF]
… DEBT sub i = (LTD + N/P)/(LTD N/P + stockholders equity) for firm i. e sub i = the residual … 1986. The master limited partnership: An alternative to the corporation … Guenther, D. 1992. Taxes and organizational form: A comparison of corporations and master limited partnerships …

Equity valuation effects of forming master limited partnershipsEquity valuation effects of forming master limited partnerships
www.sciencedirect.com [PDF]
… DEBT sub i = (LTD + N/P)/(LTD N/P + stockholders equity) for firm i. e sub i = the residual … 1986. The master limited partnership: An alternative to the corporation … Guenther, D. 1992. Taxes and organizational form: A comparison of corporations and master limited partnerships …

Taxes and organizational form: A comparison of corporations and master limited partnershipsTaxes and organizational form: A comparison of corporations and master limited partnerships
www.jstor.org [PDF]
… DEBT sub i = (LTD + N/P)/(LTD N/P + stockholders equity) for firm i. e sub i = the residual … 1986. The master limited partnership: An alternative to the corporation … Guenther, D. 1992. Taxes and organizational form: A comparison of corporations and master limited partnerships …

Shareholders' wealth and organizational restructuring: are real estate master limited partnerships different?Shareholders' wealth and organizational restructuring: are real estate master limited partnerships different?
www.aresjournals.org [PDF]
… DEBT sub i = (LTD + N/P)/(LTD N/P + stockholders equity) for firm i. e sub i = the residual … 1986. The master limited partnership: An alternative to the corporation … Guenther, D. 1992. Taxes and organizational form: A comparison of corporations and master limited partnerships …

Changes in organizational structure and shareholder wealth: the case of limited partnershipsChanges in organizational structure and shareholder wealth: the case of limited partnerships
www.jstor.org [PDF]
… DEBT sub i = (LTD + N/P)/(LTD N/P + stockholders equity) for firm i. e sub i = the residual … 1986. The master limited partnership: An alternative to the corporation … Guenther, D. 1992. Taxes and organizational form: A comparison of corporations and master limited partnerships …

Valuation consequences of master limited partnership formationValuation consequences of master limited partnership formation
www.jstor.org [PDF]
… DEBT sub i = (LTD + N/P)/(LTD N/P + stockholders equity) for firm i. e sub i = the residual … 1986. The master limited partnership: An alternative to the corporation … Guenther, D. 1992. Taxes and organizational form: A comparison of corporations and master limited partnerships …

Smarter finance for cleaner energy: Open up master limited partnerships (MLPs) and real estate investment trusts (REITs) to renewable energy investmentSmarter finance for cleaner energy: Open up master limited partnerships (MLPs) and real estate investment trusts (REITs) to renewable energy investment
papers.ssrn.com [PDF]
… DEBT sub i = (LTD + N/P)/(LTD N/P + stockholders equity) for firm i. e sub i = the residual … 1986. The master limited partnership: An alternative to the corporation … Guenther, D. 1992. Taxes and organizational form: A comparison of corporations and master limited partnerships …

Master limited partnerships shed a tierMaster limited partnerships shed a tier
heinonline.org [PDF]
… DEBT sub i = (LTD + N/P)/(LTD N/P + stockholders equity) for firm i. e sub i = the residual … 1986. The master limited partnership: An alternative to the corporation … Guenther, D. 1992. Taxes and organizational form: A comparison of corporations and master limited partnerships …



Q&A About Master Limited Partnership


What does the term "limited" mean in the term "limited partnership"?

Limited means that partners have limited liability for the debts of the company.

Who owns MLPs?

Investors own MLPs.

What does the term "partnership" mean in the term "limited partnership"?

Partnership means that there are multiple owners of an entity, rather than just one owner (like with corporations).

How are MLPs different from other partnerships?

Other partnerships are not publicly traded.

What is a master limited partnership?

A master limited partnership is a publicly traded limited partnership.

Is it possible for someone who owns units in an MLP to lose money on his/her investment if he/she sells off some or all of his/her units before he/she dies or retires ?

Yes, it's possible for someone who owns units in an MLP to lose money on his/her investment if he/she sells off some or all of his/her units before he/she dies or retires .

Can you give me some examples of common types of companies that might use a Master Limited Partnership structure ?

Some common types of companies that might use a Master Limited Partnership structure include real estate development firms,

Why do investors buy and sell units in MLPs?

Investors buy and sell units in order to make money on their investments or because they need cash flow from their investments.