What are Master Limited Partnerships (MLP)? A good question if one is unfamiliar with the world of investment brokering or does not deal with energy market investments. These entities appeared on the scene in recent years as a new means for players in the market on both ends to gain high yield returns while avoiding the tax penalties that accompany most standard investment schemes.
To put it simply: MLPs are a form of publicly traded limited partnership. These organizations do not sell stock shares but units. This distinction is important for reasons that will be explained shortly. The limited partners who are the investors in the group provide capital for the MLP’s operations, while the general partners are the ones who handle the daily operations of the MLP. Mostly, these MLPs are concerned with energy investments. The organization forges connections between companies involved in oil extraction, storage, transport, refining and distribution of petroleum products. MLPs also are involved in the coal and natural gas sectors, although given the decline of the coal market in recent years there is less involvement with that industry.
An MLP mostly engages in the midstream and downstream activities in the oil and natural gas market. They own the storage, transport, pipeine and supply companies which are the “gateway” operations between extraction and distribution. For every point at which oil or gas is conveyed through a pipeline, or when pipeline components are sold to supply gas and oil companies, or when product is moved by tanker truck, or oil and gas field equipment is sold, the MLP collects revenue and the partners get paid.
Simple to understand, isn’t it? Now, the real advantage of the MLP is how income is sheltered from certain tax pitfalls that occur with stock investments and shareholding. The MLP is much like a real estate trust. Profits and losses are transfered to the partners, the unit holders. They pay only the income tax on the distribution rather than the total investment, but up to 90% of the return of capital is tax-deferred because of depreciation allowances. And when a partner decides to sell his units, they are taxed on the basis of long-term capital gains rather than as income and therefore greatly reduces the liability. This makes the MLP a much better long-term investment than ordinary stock investment schemes. For more information about the advantages, look online at this site here.