Master Limited Partnerships Are Investing Game Changers

June 13, 2013
By Vlad Karpel

Today, a new set of business entities is revolutionizing the way businesses make money across various states in the US. Master Limited Partnerships (MLPs) are “trending” in the business world now because while they are capable of shielding their bottom line from the heavy whips of taxation, they are also known for generating high returns. This phenomenon has been making investors change the way they look at investing.

What Is an MLP?

Master limited partnership (MLP) is a limited partnership that is publicly traded on a securities exchange. As such, MLPs are extraordinary investments because they combine the tax exemptions enjoyed by a limited partnership (LP) with the liquidity of common stock.

If you’re wondering whether you have read the above paragraph correctly, then we guarantee that you have. It does sound too good to be true and very ideal but it’s true, MLPs really are tax-exempt, liquid, profitable and still regulated all at the same time. Also, the returns distributed to investors have far exceeded investor expectations. These are why more and more MLPs are mushrooming from different states as the day goes by.

What Types of Entities Can Qualify For MLP Status?

Not all businesses and partnerships may be granted an MLP status. The United States Code restricts such status only to businesses operating in particular industries, usually those dealing with the use of natural resources (e.g. pipeline businesses transporting petroleum and natural gas), commodities or real estate. Furthermore, such partnership must earn at least 90 percent of its income from the “qualifying sources” identified by the Internal Revenue Service (IRS) in order for its status application to be approved.

Structure

Master Limited Partnerships are composed of two types of partners:  the limited partners (LP) and the general partners (GP). The limited partners invest capital into the venture and receive periodic distributions whereas the general partners administer the operations of the business and receive performance-dependent incentives.

Special Tax Breaks

Since MLPs are technically partnerships, they are exempt from paying corporate income tax at both the state and federal levels. Furthermore, the limited partners are also lawfully allowed to record a pro-rated share of the MLP’s expenses on their own tax forms to reduce their income tax liability.

Special Distribution Policy

As distribution to limited partners increase due to good company performance, the incentive of managing partners would also likely increase. Due to this, managing partners have a substantial interest in improving the company’s performance.

Successful MLPs

On the average, MLPs generate higher annual current yields compared to other type of business entities. Among those that have shown remarkable performances are the Alon USA Partners, LP and CVR Refining, LP.

Alon USA Partners, LP is a Delaware limited partnership formed in August 2012. Its major operations focus on refining crude oil. In the past year, Alon has generated a staggering 23.52% current yield. On the other hand, CVR Refining, LP, also engaged in refining crude oil, managed to yield 20.69%.

Conclusion

MLPs are among the most promising investment targets today. With immunity from federal and state taxes, performance-motivating distribution policies and an exclusive niche in industries that are of high demand, MLPs definitely provide investors returns that are more competitive than the average yield.

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