A master limited partnership is a limited partnership that is publicly traded on a securities
exchange.
It combines the tax benefits of a limited partnership with the liquidity of publicly
traded securities.
MLPs are limited by United States federal law to only apply to enterprises that engage
in certain businesses, mostly pertaining to the use of natural resources, such as petroleum
and natural gas extraction and transportation.
To qualify for MLP status, a partnership must generate at least 90 percent of its income
from what the Internal Revenue Service deems "qualifying" sources.
For many MLPs, these include all manner of activities related to the production, processing
and transportation of oil, natural gas and coal.
Some real estate enterprises qualify for a similar tax treatment as a Real Estate Investment
Trust.
Other publicly traded partnerships, such as Blackstone Group or Cedar Fair, do not qualify
for pass-thru tax status and must pay federal corporate income taxes.
MLPs pay their investors through quarterly required distributions, the amount of which
is stated in the contract between the limited partners and the general partner.
Typically, the higher the quarterly distributions paid to limited partners, the higher the management
fee paid to the general partner.
This provides the general partner with an incentive to maximize distributions through
pursuing income-accretive acquisitions and organic growth projects.
Failure to pay the quarterly required distributions may constitute an event of default.
Because MLPs are classified as partnerships, they avoid corporate income tax at both state
and federal levels.
Additionally, limited partners may also record a pro-rated share of the MLP's depreciation
on their own tax forms to reduce liability.
This is the primary benefit of MLPs and gives MLPs relatively cheap funding.
The tax implications of MLPs for individual investors are complex.
While distributions from MLPs are taxed at the marginal rate of the limited partner,
there may be no tax advantage to claiming the pro-rated share of the MLP's depreciation
when the investment is held in a tax deferred account.
To encourage tax-exempt investors, some MLPs set up corporation holding companies of limited
partner claims which can issue common equity.
A general partner in an MLP often begins with a small stake of about 2% in the partnership,
but is given incentive distributions from net income after the quarterly required distributions.
Since these distributions are usually paid in the form of increased equity claims, the
general partner may attain an increased share of the partnership's ownership.
In May 2010, the first ever MLP mutual fund was launched, with a stated goal of providing
"a high level of inflation-protected income currently through a 7.8 percent distribution
yield, which is higher than equity alternatives such as REITs and Utilities."
The fund is a part of the SteelPath Mutual Fund Family.
On August 25, 2010, the first MLP exchange traded fund was launched by Alerian, the company
that manages the benchmark MLP index.
This fund was similarly designed to the above mentioned mutual fund in that it avails a
new level of diversification to investors and, according to Alerian President Kenny
Feng, "provides a single Form 1099, no K-1s, and allows investors to potentially benefit
from return of capital and qualified dividend tax treatment of distributions."
The fund is known as the Alerian MLP ETF.
As of December 28, 2013 there were 111 publicly traded master limited partnerships trading
on the various stock exchanges in the United States.
Energy MLPs Because of the stringent provisions on MLPs
and the nature of the quarterly required distributions, the vast majority of MLPs are pipeline businesses,
which earn very stable income from the transport of oil, gasoline or natural gas.
Energy MLPs are defined as those owning energy infrastructure in the United States, including
pipelines, natural gas, gasoline, oil, storage, terminals, and processing plants, though an
MLP need not own all of these or be vertically-integrated: even a small section of pipeline or a single
railroad tanker car may qualify under the current law.
See also Kommanditgesellschaft auf Aktien, a similarly-designed
business entity under German law.
References ^ [1], Master Limited Partnerships and Taxation
InvestingDaily.com, April 1, 2010.
^ Lee Brodie.
"Linn Energy Vs LinnCo: Cramer Sorts Out the Confusion".
Cnbc.com.
Retrieved June 3, 2013.
^ [2], SteelPath Launches MLP Income Mutual Fund Forbes.com, May 12, 2010.
^ [3], Alerian Benchmarks First-Ever MLP ETF Yahoo Finance, August 25, 2010.
^ [4], Master Limited Partnerships-Alphabetical List.
External links Master Limited Partnerships and Taxation
Master Limited Partnerships Overview Standard & Poors.com
MLP ETF is Here: Finally!
- InvestingDaily.com