What is a Master Limited Partnership?
A master limited partnership (MLP) is a publicly-traded partnership. How it works is that it blends features of a traditional limited partnership with those commonly seen in corporations. MLPs have pass-through tax benefits and allow investors to buy ownership interests on a public exchange.
If you’re interested in setting up an MLP or investing in one, you might wonder if it’s the right choice for you. Read the rest of this article to explore MLPs in greater detail.
What are Common Features of a Master Limited Partnership?
A master limited partnership is usually found in the energy industry. It has the following features:
- An MLP is usually created as a limited partnership (LP) instead of a corporation.
- Most MLPs are LPs because of the tax benefits. They can use LLC structures but they will be taxed as partnerships.
- MLPs have units instead of shares, which can be traded on the stock exchange.
- These business structures have general and limited partners.
- General partners conduct daily activities in the business and limited partners invest in the business.
- Distributions tend to be tax-deferred. This is because of depreciation and other deductions that can decrease the amount of available, taxable income.
- To maintain its pass-through tax benefits, the MLP needs to earn 90 percent of its gross income from qualifying sources (which can include income earned from activities like developing or transporting energy).
What is the Legal Structure of Master Limited Partnerships?
MLPs that are limited partnerships (LPs) will have a minimum of one general partner and can have hundreds (or more) of limited partners, who are known as the unit holders. The GP will have both management and board control of the LP.
If you own units of an MLP, you’ll be regarded as a limited partner. Although you won’t have a role in the business operations, you will invest capital in exchange for quarterly cash distributions.
Investors will receive a Schedule K-1 each year for when they file their taxes. This form outlines information about the unit holder’s share of losses, income, credits, and deductions.
What are Common Types of Master Limited Partnerships?
These are the common types of MLPs:
- Pipeline MLPs. These companies own pipelines for the transportation of goods such as crude oil.
- Gathering and processing MLPs. These will collect and process natural gas with the aim of getting it onto the market.
- Production MLPs. These involve activities such as exploring, developing, and producing natural gas and crude oil.
What are the Pros and Cons of Master Limited Partnerships?
There are various advantages and disadvantages about MLPs to know about. These include the following.
Pros
- Investors receive consistent, stable income.
- Distributions are mostly tax-deferred. Investors don’t have to pay tax until their investment is sold.
- The MLP doesn’t get taxed as a business because it’s a pass-through entity.
Cons
- Since MLPs are typically in slow-growth industries, this can result in slower returns on investments.
- If the MLP functions in more than one U.S. state, it might have to pay state income tax.
How are Master Limited Partnerships Formed?
An MLP can be created in several ways. An example is if an existing non-traded partnership goes public. Other ways include the following:
- Several partnerships that are non-traded join forces to become one MLP.
- A corporation separates a portion of its business to an MLP, but the corporation will maintain an ownership interest.
What are the Risks of MLPs?
There are various risks associated with MLPs. These include the following:
- Market risks. Investing in an MLP means that the price can fluctuate depending on the market or sector conditions.
- Price risks. Production MLPs are more commodity-sensitive. How much value an investment in an MLP has depends on the commodity price, such as the oil or natural gas.
- Tax risks. Although MLP income and gains pass through to their unit holders, resulting in tax benefits, it can result in tax reporting obligations. Sometimes, unit holders have to pay state and local taxes.
How Do You Invest in a Master Limited Partnership?
MLPs are traded on an exchange, so investing in them follows the same process as when you buy shares of a stock.
When considering which MLP to invest in, you should consider how much money it generates and where the money is coming from. You should search for a business with a consistent cash flow and look at what distributions investors are receiving.
Do You Need a Lawyer for a Master Limited Partnership?
Although hiring a lawyer isn’t required for a master limited partnership, it is recommended. Here are some reasons why.
- MLPs are publicly traded, which requires Securities and Exchange Commission (SEC) registration filings and various reporting requirements. Securities lawyers can help you with this.
- A lawyer will help you draft partnership agreements, which can be complex for MLPs. This contract defines important factors, such as general vs. limited partner powers and voting rights. They can also review your documents to ensure they’re legally sound.
- Since there could be multi-state tax considerations, a lawyer will help you to ensure that you remain compliant.
- A lawyer will guarantee that the business structure is correctly established so that you maintain liability protection.
Where should you hire a lawyer for a master limited partnership?
If you’re looking to hire a lawyer for help with a master limited partnership, you can find one on ContractsCounsel, an online legal network that connects clients with vetted lawyers. They’ll help you establish or invest in a MLP, ensuring you stay legally compliant and can make the most of the tax benefits.
They can also review your agreements and documents. To request a review, follow these steps:
1. Post your project on the ContractsCounsel marketplace.
2. Include some details about your project.
3. Lawyers will send you multiple bids.
4. Review the bids and the lawyers’ profiles for information regarding their client ratings, experience, field of expertise, and more.
5. Based on the information provided, you can choose the best lawyer for your requirements.
