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what-is-an-mlp

What is an MLP?

An MLP (master limited partnership) is a limited partnership that trades on the major stock exchanges just as any other C corporation. An MLP has one or more general partners that manage the partnership and many limited partners that provide capital to the partnership, but have no role in its management. Whereas investors in C corporations own shares denoting their ownership, investors in MLPs own units, and are considered limited partners. MLPs are generally required by their partnership agreements to distribute most, if not all, of their available cash to their unitholders, resulting in higher yields for investors.

A significant difference between MLPs and C corporations is that MLPs do not pay taxes at the corporate level; rather, taxes are paid at the limited partner level. This, too, results in higher yields to investors since it avoids the double-taxation of dividends. The MLP structure also allows for depreciation and depletion of assets to be passed through to the individual investor, further enhancing the tax-advantaged nature of the MLP investment.

In order to qualify as an MLP, a partnership must receive at least 90% of its income from qualifying sources. Such sources include the sale of real estate, rental income from real estate, income and capital gains from natural resources activities, etc.

MLPs have been around for more than 30 years. While most MLPs are in the energy sector, a few, such as StoneMor, operate in other qualifying sectors. There are well over 100 MLPs operating today and their structure not only benefits investors with high yield, but also provides for strong incentives for management to grow the businesses, creating more value for unitholders.