7768 / What is a master limited partnership (MLP)?

A master limited partnership (MLP) is a business entity that arose as a result of the desire of business owners to take advantage of characteristics of both corporate and partnership business entities. At the most basic level, the MLP is a type of publicly traded entity that is taxed as a partnership, but publicly traded on a national securities market in the same manner as corporate stock.¹ Generally established as LLCs with advantageous partnership flow through tax treatment, MLPs present attractive return vehicles to attract long-term capital to the energy extraction, energy transportation (“midstream”), and energy distribution (“downstream”) markets.

An MLP is required to pay out most of its annual income to investors ( Q 7769) and is permitted to carry on an active business. Distributions issued to limited partners are treated as a return of capital; the distributions issued act to reduce a limited partner’s basis to the point of that partner’s cost basis.² Once that basis reaches zero, any subsequent distribution is then taxed at current tax rates.³

The MLP business entity allows for some corporate characteristics to persist: limited liability to investors and publicly traded units. Also, the MLP provides the tax advantages of a pass-through entity partnership. As such, partners are generally permitted to take into account any loss, deduction or credit produced by the partnership at the individual level, while avoiding taxation at the entity level.⁴

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1.  IRC § 7704(b).

2.  IRC § 733.