Master Limited Partnerships - Back In Vogue?
Auguest 8, 2004
By Richard Smith, LLB
Do you need to find a legal way whereby
your organization's profit earnings are effectively
only taxed once, rather than the standard twice -
at corporate profit level and then again at dividend
distribution level - that is so common the practice
these days?
Well, if you are, you may want to give
some consideration to master limited partnerships.
A master limited partnership (MLP) is effectively a partnership
that has one single asset - holding shares in a limited liability
partnership - the profits from which allows it to sell units in
itself to the general public. Structuring itself like this means
that the MLP can return to unit-holders more of its cash and profits
than would be the case if it where a company trying to pay dividends
to its shareholders.
Master Limited Partnerships - The Ideal Candidate
An essential factor of an MLP is that it be considered a partnership
under the Internal Revenue Code. Not to be would be a disaster,
as the MLP would then be subject to the same taxation rules as a
corporation; thereby negating probably the number one reason for
having this structure.
However, in order to be considered a partnership under the Inland
Revenue Code, the MLP needs to evidence that , at minimum, 90 percent
of its income is derived from a "qualifying income", as
defined under the Inland Revenue Code.
Basically, this means that the MLP need to derive income from:
(a) the exploration, development, mining, etc. of any mineral or
natural resource;
(b) rent;
(c) gains from the sale of real property, or capital assets;
(d) interest; and
(e) dividends.
Consequently, the most ideal candidates for MLP status are seen
as oil exploration companies and real estate agents/brokers who
can then make cash distribution of profits directly to their unit-holders.
So, if you're an oil magnate or real estate broker looking for
a good, safe tax efficient way to redistribute profits back to your
partners and members, now you know a way how to!
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