Legal Definitions - master limited partnership

A master limited partnership (MLP) is a unique type of business structure that combines features of both a partnership and a corporation. While it is publicly traded on a stock exchange, similar to a corporation, it is taxed like a partnership. This means that the MLP itself does not pay corporate income tax; instead, its profits, losses, and deductions are passed directly through to its investors, known as "unitholders" or "limited partners." These unitholders then report their share of the MLP's income or losses on their individual tax returns.

MLPs are typically found in industries that involve natural resources, such as the transportation and storage of oil and gas, mineral extraction, or other infrastructure projects. Investors in an MLP own "units" rather than shares, and they often receive regular cash distributions from the partnership's earnings.

Here are some examples to illustrate how a master limited partnership operates:

• Example 1: Interstate Oil Pipeline Company

  Imagine a company that owns and operates a vast network of pipelines transporting crude oil and refined petroleum products across multiple states. This company requires significant capital to maintain and expand its infrastructure. By structuring itself as a master limited partnership, it can raise money from public investors by selling units on a stock exchange. Investors who buy these units become limited partners. They receive regular cash distributions generated from the fees the pipeline charges for transportation services. For tax purposes, the MLP itself doesn't pay corporate income tax; instead, the profits and losses are passed through to the unitholders, who report them on their personal tax returns. This structure allows the company to attract investors seeking income and exposure to the energy sector without the burden of corporate-level taxation.

• Example 2: Natural Gas Processing and Storage Facility

  Consider a business that specializes in processing raw natural gas to remove impurities and then storing the refined gas in large underground caverns before it's distributed to consumers. This operation involves substantial fixed assets and ongoing maintenance. If this business is organized as an MLP, it can list its units on a public exchange, allowing individual and institutional investors to buy into the partnership. These unitholders would then receive quarterly distributions derived from the fees charged for processing and storing natural gas. The partnership structure ensures that the income generated by these operations is taxed only once, at the unitholder level, making it an attractive investment vehicle for those interested in energy infrastructure.

• Example 3: Coal Terminal and Export Operation

  Picture a company that owns and operates a large terminal facility designed to receive, store, and load coal onto ships for export. This involves significant infrastructure, including rail lines, conveyor systems, and deep-water docks. By forming a master limited partnership, this company can raise capital from the public market to fund its operations and expansion projects. Investors who purchase units in this MLP become limited partners and receive distributions based on the cash flow generated from handling and exporting coal. The MLP avoids corporate income tax, passing through its taxable income and deductions directly to its unitholders, who then handle the tax implications on their personal returns. This allows investors to participate in the profits of a capital-intensive commodity logistics business.