What is a 'Master Limited Partnership - MLP'
A master limited partnership (MLP) is a type of business organization that exists in the form of a publicly traded limited partnership. There are two classes of partners in a master limited partnership: limited partners and general partners. Limited partners are investors that purchase units in the MLP that provide the capital for the MLP's operation and that receive periodic income distributions from the MLP's cash flow, whereas the general partners are responsible for managing the day to day operation of the MLP and that receive compensation based on the performance of the MLP's business venture.
BREAKING DOWN 'Master Limited Partnership - MLP'MLPs are most commonly present in the energy industry, providing and managing resources such as oil and gas pipelines. These types of business endeavors are conducive to producing regular income, thus enabling MLPs to offer attractive income yields, because they earn stable income that is often based on long-term service contracts. An example of an MLP is Genesis Energy L.P., which provides pipeline transportation, refinery services, and supply and logistics support services for oil companies.
Characteristics of an MLP
An MLP differs from a corporation in that an MLP is considered the aggregate of its partners rather than a separate legal entity. The most distinguishing characteristic of an MLP is the fact that an MLP combines the tax benefits of a partnership, by virtue of the fact that the profits generated from the MLP are only taxed when unitholders in the partnership receive distributions, with the liquidity of a company that is publicly traded. An MLP also differs from a corporation in that it technically has no employees; the general partners are responsible for providing all necessary operational services.
Limited partners invest in an MLP by purchasing publicly traded units, and are commonly referred to as unitholders rather than shareholders.
Tax Advantages for MLP Unitholders
The major benefit of an MLP is its tax advantage. MLPs allow for what is known as pass-through income. Pass-through income means that the MLP itself is not liable for corporate income taxes as is a corporation. Instead, the owners, or unitholders, of the MLP are only personally liable for income taxes on their portions of the MLP's earnings. The advantage of this structure is that it avoids the double taxation scenario in which corporations pay corporate income taxes, but shareholders must also pay personal income taxes on the income derived from their stock shares.
MLPs make distributions to unitholders, typically on a quarterly basis, similar to dividends paid to stock shareholders. Another tax advantage of MLPs is that much of the income distribution that unitholders receive is tax-deferred until the unitholder sells his units, and is then taxed at the lower capital gains rate rather than at the higher personal income rate.
An advantage that draws many of the investors in an MLP is the fact that MLPs commonly offer yields that are substantially higher than the average dividend yield available from stocks.