As we continue our discussion on Income Investing opportunities, today we want to discuss MLPs, otherwise known as Master Limited Partnerships. By definition, an MLP is a type of limited partnership that is publicly traded. With this type of partnership there are two types of partners.
Partner A: The person or group that provides the capital to the MLP and receives periodic income distributions from the MLP’s cash flow,
Partner B: The general partner who is responsible for managing the MLP’s affairs and receives compensation that is linked to the performance of the venture.
MLPs combine the tax structure of limited partnerships with the liquidity of publicly traded securities, they also usually provide their investors (the limited partners) with distributions.
A few important things to note about MLPs:
1. MLPs distributions are similar to dividends but paid out on a quarterly basis.
2. MLPs allow for “pass through income”, meaning they are not subject to corporate taxes and eliminates the “double taxation” rule.
3. Because MLPs are not subject to income tax, more cash is available for distributions than would be available had the company incorporated. This generally makes MLP units worth more than similar shares of a corporation.
4. MLP income is on the list of acceptable sources of income for mutual funds, with some conditions. One condition is that that mutual funds may not invest more than 25% of their assets in MLPs and they may not own more than 10% of any one MLP.
To get a detailed understanding of how MLPs work and whether or not they are right for your portfolio, contact our office to schedule an appointment.