Master Limited Partnership vs. Limited Part🏅ners✃hip: An Overview

Generally, a partnership is a business that is owned by two or more individuals. In all forms of partnerships, 🙈each partner is required to contribute resources such as property, money, skill, or labor in exchange f♌or sharing in the profits and losses of the business.

For limited partnerships and master limited partnerships, the simplest way to explಌain the difference between the two business structures is that the latter is publicly traded while offering the tax benefits of a limited partnership. 

Limited Partnership

A limited partnership features at least one 澳洲幸运5官方开奖结果体彩网:general partner and at least one limited partner. The general partner acts as the owner🔴 and is responsible for day-to-day operations. They are also personally liable for the business’s debts. In other words, if the business becomes over-leveraged and can’t meet its debt obligations, then the general partner might be forced to sell personal assets.

Meanwhile, a limited partner only invests money in the business. They have no say in the day-to-day operations and are𓃲 not personally liable for the business’s debts. A limited partner is also not susceptible to litigation.

The only potenti🌞al loss relates to the investment in the partnership; however, if a limited partner begins to take an active role in the business, that partner can become personally liable for both debt and litigation.

Since a limited partner is not active in the day-to-day operations of the business, that partner does not have to pay a 澳洲幸运5官方开奖结果体彩网:self-employment tax. It is not considered earned income. In a limited partnership, the limited partners are essentially trading the𝔍ir role in day-to-day oper🅰ations for not having to worry about being liable for the business’s debts or litigation.

Master Limited Partnership

A 澳洲幸运5官方开奖结果体彩网:master limited partnership (MLP) is a type of business venture that exists in the form of a publicly traded limited partnership. With a master limited partnership, limited partners still get the tax advantage and they are not liable, but these advantages are now combined with 澳洲幸运5官方开奖结果体彩网:liquidity since MLPs are traded like equities.

An MLP must generate 90% of its revenue from natural resources. This can pertain to energy pipelines, energy storage, commodities, or real estate. The quarterly distributions to limited partners stem from cash flow. This is a positive because cash flow is seen as steady.

For example, most MLPs have locked into long-term contracts and have hedged prices. Historically, this has led to lower volatility than their peers. Additionally, since income is passed on to unit holders (limited partners), an MLP avoids 澳洲幸运5官方开奖结果体彩网:double taxation. This saves capital, which can then be applied to day-to-day operations and future projects.

The word "master" in MLPs pertains to the general partner, who will usually own 2% of the MLP. The master partner can increase their share by purchasing additional units as a limited partner. The master partner is also responsible for day-to-day operations.

The general partner has a performance incentive because if quarterly cash distributions rise, then the general partner will receive a greater share. Those quarterly cash distributions, by the 🌞way, are 80% to 90% tax deferred thanks to depreciation.

MLPs usually yield 5% or higher. When you combine this factor with low volatility and 澳洲幸运5官方开奖结果体彩网:a tax advantage, MLPs look appealing. Furthermore, when a limited partner eventually sells all of their shares, it will be treated as 澳洲幸运5官方开奖结果体彩网:capital gains, not ordinary income.

One negative aspect is that most MLP investors are investing in pipelines, and many pipelines stretch across more than one state. This means you will have to pay taxes in multiple states. Check with your tax advisor because certain states offer eꦜxemptions.

Key Differences

Here are the key differences between a limited part𒐪nership and 🅘a master limited partnership.

The Bottom Line

While there are advantages to investing in a limited partnership, investing in an MLP adds liquiꦚdity. Therefore, if you ever need to free up capital for an emergency or an unexpected project, you will be able to do so with ease by trading an MLP🃏.