A major reason that investors buy MLPs (versus bonds) is the potential to see their distributions grow faster than inflation.
Generally, a company chooses to be a master limited partnership to avoid double taxation of dividends. So instead of the partnership paying taxes on its profits (like a corporation), each limited partner is responsible on his or her individual income tax for a proportional share of the MLP's income allowing a higher cash flow payout to unitholders. The MLP format is more tax-efficient.
- Desirable to income-oriented investors
- Offers investors an interest in a group of diversified assets controlled by the partnership
- When publicly traded, MLP units may be bought and sold like stock providing investors investment liquidity
- A portion of the distribution may be shielded from ordinary income taxes and treated as a reduction in a unitholder's original cost basis in the investment
- MLP's grow mainly by making effective acquisitions
- Distributions (similar to dividends) are not guaranteed
- Unitholders could be subject to reporting in states in which the MLP has operations
- Investors may have to pay taxes on their proportional share of the MLP's income, even if the MLP does not distribute cash
Investors should consult with a tax advisor concerning their individual tax situations.