A master limited partnership (MLP) is really 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 which are traded on a security exchange just like shares of any other stock. To qualify as a MLP, a business must generate at the least 90% of its income from operations in the true estate, financial services, or natural resources sectors.
The major basis for a business to go into a company structured as a MLP may be the tax avoidance. Unlike corporations, master limited partnerships aren’t at the mercy of 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 Gain Reduction MLP’s income, gains, losses and deductions. On quarterly basis, MLPs make distributions which are just like dividends to its unit-holders. Unlike dividends, these distributions aren’t taxed when they’re received because they are considered return of principal. That results in higher yield, because the money that would have been paid for income taxes are distributed to investors. Furthermore, the tax law allows companies to amortize or depreciate money that’s dedicated to an asset. MLPs allow those deductions to feed to the unit-holder, who pays no taxes until decides to market the investment. At the feature, the investor has to pay taxes over the realized capital gains (the difference between the sales price and the first cost). The capital gains are taxed at a lesser tax rate and the unit-holders end up paying less overall in taxes than they would when 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 haven’t any involvement in the company’s operation activities but investing capital and obtaining periodic cash distributions in return. Generally, the general partners receive 2% of the complete partnership pie and they have the best your can purchase limited-partner units to improve its ownership percentage. A distinguishing characteristic of MLP may be the incentive distributions rights (IDRs). Considering the truth that company performance is measured by the money distributions to the limited partners, IDRs provide the general partners with a performance- based pay for successfully managing the master limited partnership. The IDRs are structured in such way that for every single incremental dollar in cash distribution, the general partners receive higher marginal IDR payments, which could increase the first 2% distributable cash to higher levels such as 15%, 25% around 50%.
The truth that master limited partnerships pay no federal and state income tax ensures that more cash is available for distributions. This makes MLP units worth far more than similar shares of corporation. The worthiness of MLP’s units is determined by the distributable cash flow. Therefore, nearly all MLPs operate in very stable, slow-growing sectors of the vitality industry, such as pipelines and storage terminals. These assets produce steady cash flows with little variations that allow the MLP to generally meet its cash distribution requirements.