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The Benefits of an MLP

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.

MLP Advantages

  • 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

Other Factors

  • 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.

 
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