Understanding Master Limited Partnerships

In the United States there are a number of different legal entity types that a business can take, and a master limited partnership is one such identity. A Master Limited Partnership is a form of partnership that is publicly traded, and that enjoys both the liquidity associated with publicly traded securities and the benefits of having limited liability.

Master limited partnerships have many tax benefits. Companies get their income from several sources such as oil and gas refining, mining or extraction, or exploration, or the production of an alternative fuel such as biodiesel. They generate at least 90 percent of their revenues from such a qualifying source, and then they will qualify for ‘master’ status and those benefits. Master Limited Partnerships are expected to pay their investors every three months in a ‘required distribution,’ with other optional payments as well. The amount that the partnership is required to pay out will depend on the amount stated in the contract that is made between the investors and the managers. There is usually some incentive to maximize the amount distributed – either through organic growth or by pursuing acquisitions that can add income.


Usually, the general partners in an MLP will start with a relatively small stake (around two percent is not unusual) and then be given distributions from net income, in addition to the required quarterly distribution.

An MLP is unique in that it has not just the traditional governance committee, but also a conflicts committee which is made up of at least two independent directors. This committee will review any specific matters that have been authorized by the board of directors, to ensure that there is no conflict of interest. The general partner should assess committee members to make sure that they are sufficiently independent of the parent company.

MLPs & Taxes

MLPs do not pay tax using the regular corporation model. Rather, they are a pass-through entity for income tax purposes, and they can be used to reduce tax in several ways – for example, limited partners can pro rata some of the MLP’s depreciation onto their own tax forms, to help them reduce liability.

Before you set up or join an MLP, it is a good idea to seek professional financial advice. The tax implications associated with master limited partnerships can be quite complicated, and if you get things wrong you could face hefty fines. There are many appealing things about buying into an MLP, but there are areas where you could end up generating liability for unrelated business income tax.

There are many successful MLPs. The first one formed was Apache Petroleum Company, and since then the organization structure has become popular with many industries – including hotels, restaurants, real estate and even sports and entertainment. The MLP structure could be perfect for your business, or it could be one that is full of pitfalls. You never know until you truly investigate it.