A master limited partnership (MLP) is a unique investment that combines the tax advantageous asset of a restricted partnership with the liquidity of a publicly traded stock, allowing stockholders quickly to purchase or sell their stocks. MLPs issue investment units which are traded on a security exchange the same as shares of some other stock. To qualify as a MLP, an organization must generate at the very least 90% of its income from operations in the true estate, financial services, or natural resources sectors.
The major reason behind an organization to get into a company structured as a MLP could be the tax avoidance. Unlike corporations, master limited partnerships are not subject to double taxation (paying taxes at both corporate and personal levels). The owners of the partnership are taxed only once on the individual portions of the Master Limiter MLP’s income, gains, losses and deductions. On quarterly basis, MLPs make distributions which are much like dividends to its unit-holders. Unlike dividends, these distributions are not taxed when they’re received since they’re considered return of principal. That results in higher yield, because the money that would have been paid for income taxes are distributed to investors. Furthermore, the tax law allows companies to amortize or depreciate money that’s invested in an asset. MLPs allow those deductions to pass through to the unit-holder, who pays no taxes until decides to offer the investment. At the feature, the investor has to pay for taxes on the realized capital gains (the difference between the sales price and the first cost). The capital gains are taxed at a diminished tax rate and the unit-holders find yourself paying less overall in taxes than they’d if it were considered interest instead.
MLPs contain two business entities: general partners and limited partners. General partners manage the day-to-day operations of the MLP, while limited partners don’t have any involvement in the company’s operation activities but investing capital and obtaining periodic cash distributions in return. Generally, the typical partners receive 2% of the whole partnership pie and they’ve the right to possess limited-partner units to increase its ownership percentage. A distinguishing characteristic of MLP could be the incentive distributions rights (IDRs). Considering the fact company performance is measured by the money distributions to the limited partners, IDRs provide the typical partners with a performance- based pay for successfully managing the master limited partnership. The IDRs are structured in such way that for every single incremental dollar in cash distribution, the typical partners receive higher marginal IDR payments, that may increase the first 2% distributable cash to raised levels such as 15%, 25% around 50%.
The truth that master limited partnerships pay no federal and state income tax ensures that more cash is available for distributions. This makes MLP units worth a great deal more than similar shares of corporation. The value of MLP’s units is determined by the distributable cash flow. Therefore, nearly all MLPs operate in very stable, slow-growing sectors of the power industry, such as pipelines and storage terminals. These assets produce steady cash flows with little variations that enable the MLP to generally meet its cash distribution requirements.