what is a master limited partnership mlp 
a master limited partnership mlp is a business venture in the form of a publicly traded limited partnership it combines the tax benefits of a private partnership with the liquidity of a publicly traded company a master limited partnership trades on national exchanges mlps generally experience cash flow stability and are required by the partnership agreement to distribute a set amount of cash to investors their structure can also help reduce the cost of capital in capital intensive businesses such as the energy sector the first mlp was organized in 1981 however by 1987 congress effectively limited the use of them to the real estate and natural resources sectors these limitations were put into place out of concern over too much lost corporate tax revenue mlps do not pay federal income taxes 12understanding master limited partnerships mlps the mlp is a hybrid legal entity that combines elements of two business structures a partnership and a corporation first of all it is considered the aggregate of its partners rather than a separate legal entity as is the case with a corporation second it technically has no employees the general partners are responsible for providing all necessary operational services general partners usually hold an approximate 2 stake in the venture and have the option to increase their ownership 13an mlp issues units instead of shares however these units are often traded on national stock exchanges as a result they are a liquid security traditional partnerships cannot offer the same level of liquidity since an mlp s publicly traded units are not stock shares those who invest in mlps are commonly referred to as unitholders rather than shareholders those who buy into an mlp are called limited partners these unitholders are allocated a share of the mlp s income deductions losses and credits 31mlps have two classes of partners tax treatment of mlpsan mlp is treated as a limited partnership for tax purposes which is a significant tax advantage for investors a limited partnership has a pass through or flow through tax structure this means that all profits and losses are passed through to the limited partners the mlp itself pays no taxes on its revenues as most incorporated businesses do instead the limited partners pay income taxes only on their portions of the mlp s earnings 51further deductions such as depreciation and depletion also pass through to the limited partners limited partners can use these deductions to reduce their taxable income 6to maintain its pass through status at least 90 of the mlp s income must be qualifying income qualifying income includes income realized from the exploration production or transportation of natural resources or real estate in other words to qualify as a master limited partnership a company must generate all but 10 of its revenues from natural resources or real estate activities this definition of qualifying income reduces the sectors in which mlps can operate 7quarterly distributions from the mlp are not unlike quarterly stock dividends however a portion of a distribution is treated as a return of capital roc as opposed to dividend income so the unitholder does not pay income tax on the distribution instead the distribution reduces the cost basis of units 8the distributions remain tax deferred until unitholders sell their interests in the mlp then the difference between the cost basis and sale price is taxed at a combination of the ordinary income tax rate on the return of capital distribution and the capital gains tax rate on the appreciation of the units since purchase this offers a significant additional tax benefit 89mlps are taxed as partnerships not corporations so their profits are not subject to the double taxation that corporations face corporations pay corporate tax and then the shareholders must pay personal taxes on the income from their holdings advantages and disadvantages of mlpslike any investment mlps have their pros and cons mlps may not work for all investors an investor must weigh the disadvantages against the benefits of holding units of mlps before they invest steady incomerelatively low risktax advantaged treatmentliquiditylimited liability for debtscomplex tax filinglimited capital appreciationlimited to a few sectorsexamples of mlpscurrently most mlps operate in the energy industry an energy master limited partnership emlp typically provides and manages resources for other energy based businesses examples might include firms that provide pipeline transportation refinery services and supply and logistics support services for oil companies many oil and gas firms will organize mlps instead of issuing shares of stock using the mlp structure they can both raise capital from investors and maintain a stake in operations 1some corporations may own a sizable interest in their mlps they may also set up separate stock issuing companies whose role is to own units of the corporation s mlp this structure allows them to redistribute the passive income through the corporation as regular dividends an example of this structure was linn energy inc which had both an mlp line and a corporation that owned an interest in the mlp lnco investors had the option to choose for tax purposes how they would like to receive the income the company generated the firm was dissolved in 2017 after filing for bankruptcy in 2016 it was reorganized in 2018 as two new companies riviera resources and roan resources both of which exist today investors in line were given an exchange offer to convert their units into shares of the new entities 151617as many mlps operate in the resources sector their fortunes are determined by volatile energy and commodities prices as evidenced by linn energy s bankruptcy the alerian mlp index the leading gauge of energy infrastructure mlps measured an annualized five year return of 6 2 for the period ending june 30 2023 electricity prices were in a slight upward trend over most of that period however with crude oil prices rebounding approximately 74 from 2022 to 2023 the alerian mlp index surged 30 over that three year period 18192021an investor interested in buying mlps could consider investing in a portfolio of mlps that is diversified across sectors in order to reduce risk for example brookfield asset management a leading global alternative asset manager with approximately 850 billion of assets under management has mlps in the real estate infrastructure and renewable energy sectors 22