Master limited partnerships, or MLPs, are a type of stock market investment that often pays very attractive distribution yields. Most stocks that trade on exchanges are shares of corporations. As the name implies, an MLP is a type of partnership, and investors buy units of the partnership instead of shares of stock.
A master limited partnership company has two types of ownership. The general partner portion is held by the company controlling the business of the MLP. The general partner makes all of the decisions about company operations. Limited partner investors have no say in the running of the company. Limited partners do not have voting rights like corporate shareholders. Limited partners participate in the profits and some of the business write-offs of the MLP. The traded shares of an MLP are limited partner units.
The terminology of MLP investing is different from when you buy shares of a corporation. You own limited partner units of an MLP, not shares. The earnings payouts are called distributions, not dividends. The distributions paid to MLP limited partner unit holders -- investors -- represent the limited partners' shares of the MLP cash flow, including income, depreciation and return of capital. Investing in an MLP is technically becoming a partner in the business. MLP units are bought and sold just like corporate stock shares.
Types of MLP Businesses
The use of the MLP business structure is most prevalent in the energy sector. MLP companies include crude oil, natural gas and refined energy product pipeline companies, and oil and gas exploration and production companies. Other business sectors that use MLP structure include chemical manufacturing plants, energy refining and storage, natural resources, retail propane sales and a handful of financial services companies. If a company has the words "partners" or "LP" included in its name, it is probably one of the approximately 100 MLP companies trading on the U.S. stock exchanges.
MLP Investing and Taxes
As partnerships, most MLP companies issue a Schedule K-1 form to investors instead of the 1099-DIVs sent out by corporations. The K-1 from an MLP will break down the distributions paid into categories such as ordinary income, capital gains and depreciation. Much of the K-1 income received from an MLP might not be taxable income, but instead reduces the cost basis of the units owned by an investor. MLP K-1 income requires the completion of several extra tax forms compared with regular dividend income.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.