Definition
A Master Limited Partnership (MLP) is a type of business structure that exists in the form of a publicly traded limited partnership. It combines the benefits of a partnership — where profits are taxed only once when distributed to investors — with the liquidity of a public company. MLPs primarily operate in the natural resources, financial services, and real estate industries.
Key Takeaways
- Master Limited Partnership (MLP) is a type of business venture that exists in the form of a publicly traded limited partnership. It combines the tax benefits of a partnership, with the liquidity of a public company.
- MLPs are primarily found in the energy industry, particularly in natural resources such as oil and gas. This is because the laws governing MLPs require that they derive most of their income from real estate, natural resources, and commodities.
- Investors in an MLP are referred to as limited partners or unit holders. They can benefit from the company’s profits through distribution payments. However, unlike shareholders of a corporation, they have no voting rights in the company’s operations or management.
Importance
Master Limited Partnership (MLP) is a crucial finance term because it offers a unique investment structure focused on the distribution of cash flows.
It combines the tax benefits of a partnership with the liquidity of publicly traded securities, which means company profits are only taxed once at the investor level, unlike corporations.
MLPs are traditionally associated with assets that generate steady cash flows, predominantly in the energy sector.
Investors are attracted to MLPs for their high yield and growth potential, while businesses benefit from lower capital costs and increased liquidity.
Hence, understanding MLPs is essential in financial planning and investment decision-making.
Explanation
A Master Limited Partnership (MLP) is primarily used to structure investments in natural resources, such as oil and gas, minerals, and timber. As a unique type of investment vehicle, MLPs mainly serve to combine the tax benefits of a partnership with the liquidity of a publicly-traded security.
The primary purpose of an MLP is to distribute available cash to investors, aiming to combine the tax benefits of a limited partnership with the liquidity of a publicly-traded company. In terms of its functionality, MLPs, in most cases, operate in the energy sector.
They collect, process, store, and transport commodities such as oil and gas. They also distribute nearly all their income to the partnership “units,” similar to shareholders in a corporation.
These distributions provide a consistent cash flow to unit holders and make MLPs attractive to investors seeking a regular income. Additionally, because MLPs are not required to pay federal income taxes, the burden falls on the individual unit holders, making MLP investments more tax-efficient than the identical investments in corporations.
Examples of Master Limited Partnership
Enterprise Products Partners (EPD): A U.S based natural gas and crude oil pipeline company. As a Master Limited Partnership, EPD enables its investors to have a stake in the pipeline infrastructure while enjoying tax advantages.
The Blackstone Group (BX): Another example of a Master Limited Partnership, this investment firm specializes in private equity, credit, and hedge fund investment strategies. Investors in this MLP enjoy the benefits of the firm’s strong performance with additional tax advantages.
Magellan Midstream Partners (MMP): This is a publicly traded partnership that primarily transports, stores, and distributes petroleum products. By structuring itself as an MLP, MMP offers its investors a yield-oriented investment that combines the tax advantages of a limited partnership with the liquidity of a publicly-traded security.
FAQs for Master Limited Partnership
What is a Master Limited Partnership (MLP)?
A Master Limited Partnership (MLP) is a type of business venture that exists in the form of a publicly traded limited partnership. It combines the tax benefits of a partnership with the liquidity of a public company.
How does a Master Limited Partnership (MLP) work?
MLPs issue units instead of shares, which represent a limited partnership interest. Investors in an MLP are generally entitled to a share of the company’s income, deductions, losses and credits.
What are the benefits of a Master Limited Partnership (MLP)?
The main advantage of an MLP is that it combines the tax benefits of a partnership with the liquidity of a publicly traded security. MLPs are also able to raise cash in two ways: issuing new units and borrowing. This provides a significant amount of capital to finance organic growth, acquisitions and maintain steady payouts to investors.
What are the risks of investing in a Master Limited Partnership (MLP)?
The risks of investing in MLPs include changes in commodity prices and regulatory risk. Since MLPs often distribute the majority of their cash flow, their ability to fund growth internally is limited and as such they may be more reliant on external funding sources than companies in other sectors.
Which sectors commonly use the Master Limited Partnership (MLP) structure?
The most common sector you’ll see MLS are in the energy industry, specifically in businesses such as natural gas, crude oil, and refined product pipelines. Other sectors may include investment in real estate, minerals, and more.
Related Entrepreneurship Terms
- Distribution
- General Partner (GP)
- Limited Partner (LP)
- Publicly Traded Partnership (PTP)
- Qualified Income
Sources for More Information
- Investopedia: A comprehensive resource for definitions, explanations, and examples of finance terms including Master Limited Partnership.
- Fidelity Investments: A financial services corporation that provides detailed investment information, including Master Limited Partnership.
- Bloomberg: A major global provider of 24-hour financial news and information, including articles about Master Limited Partnership.
- U.S. Securities and Exchange Commission (SEC): The agency of the U.S government which regulates the securities industry, including Master Limited Partnership.
