In a nutshell, a Master Limited Partnership (MLP) is simply a way of structuring a business that is legally recognized by the U.S government. As the name implies, ownership of the business is divided among two or more partners whose liability is usually limited to the amount they invested in the business (in case of bankruptcy). Typically, one of the partners runs operations as the General Partner (GP), while the other Limited Partners (LPs) act as passive investors. Unlike most partnerships, MLPs can be traded publicly on U.S. security exchanges like stocks. Investors typically can purchase "units" of the LP and, like dividend paying stocks, they receive periodic "distributions" of cash as a return on their investment. As we'll explore in a later post, most MLPs are involved in the transportation, processing, and storage of natural gas and other petroleum products.
MLP Tax Benefits
What makes the MLP structure particularly favorable is the special tax treatment it receives. MLPs do not pay tax at the corporate or business 'entity' level. This eliminates one of the key drawbacks of investing in publicly traded corporations: the 'double taxation' of dividends. For example, if I invest in a public company, I effectively get hit with taxes twice when I receive a dividend payment. Why? The company already had to pay taxes at the corporate level on its earnings (which essentially represent my return on investment). Subsequently, when the company pays me a dividend I get taxed again on that as income. The absence of a corporate level tax is one of the most significant advantages the MLP has in its arsenal.
