A master limited partnership (MLP) is a unique investment that combines the tax advantageous asset of a small partnership with the liquidity of a publicly traded stock, allowing stockholders quickly to get 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 business must generate at least 90% of its income from operations in the true estate, financial services, or natural resources sectors.
The major reason behind a business to go into a small business structured as a MLP may be the tax avoidance. Unlike corporations, master limited partnerships aren’t susceptible 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 that are much like dividends to its unit-holders. Unlike dividends, these distributions aren’t taxed when they are received since they are considered return of principal. That results in higher yield, because the money that could 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 sell the investment. At the feature, the investor has to pay for taxes within the realized capital gains (the difference involving the sales price and the initial cost). The capital gains are taxed at a lower 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 overall partners receive 2% of the complete partnership pie and they have the best to own limited-partner units to improve 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 in such way that for every single incremental dollar in cash distribution, the overall partners receive higher marginal IDR payments, that may increase the initial 2% distributable cash to raised levels such as for instance 15%, 25% around 50%.
The fact that master limited partnerships pay no federal and state income tax implies that more cash is available for distributions. This makes MLP units worth a lot more than similar shares of corporation. The value of MLP’s units is set by the distributable cash flow. Therefore, many MLPs operate in very stable, slow-growing sectors of the energy industry, such as for instance pipelines and storage terminals. These assets produce steady cash flows with little variations that enable the MLP to generally meet its cash distribution requirements.