Master Limited Partnership - What Is It?
Auguest 7, 2004
By Richard Smith, LLB
A master limited partnership (or MLP as
it also commonly known) is a publicly traded entity
with a structure similar to, but a little more complex
than, an ordinary limited partnership.
Basically, with master limited partnerships, what
you have is a two-tier structure. At tier-one level
you have a partnership which conducts its business
in the normal manner - and is registered as a limited
liability partnership, or even a limited liability
limited partnership.
At the tier-two level you have an entity that is publicly
traded, but whose major, if not only, asset is its interest in the
tier-one partnership; which, in normally circumstances, accounts
for 99 percent of the tier-one partnership. The general partner
of the MLP then sells units in the MLP to the general public.
If this sounds confusing, then an easier way of looking
at an MLP is to see it as the holding company of the limited partnership.
As simply the holding company of the limited partnership, it is
not uncommon for the partners of the limited partnership and MLP
to be one in the same.
Master Limited Partnership - The Advantages
The advantages of having an MLP structure are two-fold. First, having
a publicly traded MLP means that the partners can avoid having to
file their names and addresses with the state agencies responsible
for keeping an eye on them - something they cannot avoid if the
structure is merely a limited liability partnership.
Second, and probably more importantly, revenue on an MLP is only
taxed once, at the unit-holder level. However, in order to benefit
from this, it is essential that the MLP be taxed as a partnership
- a factor which means that at least 90 per cent of the MLP's gross
income must be derived from a "qualify income" - as defined
under the Internal Revenue Code.
So, if you are thinking of establishing an MLR, make sure you obtain
qualified assurances that you meet the strict "qualify income"
requirement, otherwise you may not be considered a partnership under
the Inland Revenue Code, thus negating the very reason for having
the structure in the first place!
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