A master limited partnership (MLP) is a unique investment that combines the tax benefit 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 that are traded on a security exchange just like shares of any other stock. To qualify as a MLP, a company must generate at least 90% of its income from operations in the true estate, financial services, or natural resources sectors.
The major reason for a company to enter a business structured as a MLP may be the tax avoidance. Unlike corporations, master limited partnerships are not susceptible to double taxation (paying taxes at both corporate and personal levels). The owners of the partnership are taxed only once on their individual portions of the MLP’s income, gains, losses and deductions. On quarterly basis, MLPs make distributions that are just like dividends to its unit-holders. Unlike dividends, these distributions are not taxed when they’re received because they’re considered return of principal. That results in higher yield, because the cash that would have been covered income taxes are distributed to investors. Furthermore, the tax law allows companies to amortize or depreciate money that is invested in an asset. MLPs allow those deductions to feed to the unit-holder, who pays no taxes until decides to offer the investment. At the feature, the investor has to cover taxes on the realized capital gains (the difference involving the sales price and the original cost). The capital gains are taxed at less tax rate and the unit-holders wind up 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 Gain Reduction -day operations of the MLP, while limited partners haven’t any involvement in the company’s operation activities but investing capital and obtaining periodic cash distributions in return. Generally, the overall partners receive 2% of the complete partnership pie and they have the right your can purchase limited-partner units to increase its ownership percentage. A distinguishing characteristic of MLP may be the incentive distributions rights (IDRs). Considering the fact company performance is measured by the bucks distributions to the limited partners, IDRs provide the overall partners with a performance- based purchase successfully managing the master limited partnership. The IDRs are structured such way that for every single incremental dollar in cash distribution, the overall partners receive higher marginal IDR payments, which could increase the original 2% distributable cash to raised levels such as for example 15%, 25% as much as 50%.
The fact master limited partnerships pay no federal and state income tax ensures that more cash can be acquired for distributions. This makes MLP units worth a whole lot more than similar shares of corporation. The worth of MLP’s units is decided by the distributable cash flow. Therefore, the majority of MLPs operate in very stable, slow-growing sectors of the energy industry, such as for example pipelines and storage terminals. These assets produce steady cash flows with little variations that allow the MLP to generally meet its cash distribution requirements.