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I came across a reference to a "Master Limited Partnership" in a news article recently. I understand they are exchange-listed investments like individual stocks. But, what exactly are Master Limited Partnerships, and how are they different from regular company stocks?

Are MLPs appropriate holdings for individual investors? What are some well-known, if any, exchange-listed MLPs?

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  • And to compound the confusion, you can now own MLPs in ETF and ETN form. After reading about them, the tax and ownership ramifications are still not clear to me. – James Roth Oct 12 '10 at 20:41
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I was hesitant to answer this question since I don't own MLP even though I'm aware of how they work. But hear crickets on this question, so here goes. I'll try to keep this as non technical as possible.

MLPs are partnerships where a shareholder is a partner and liable for the partnership's taxes. MLPs don't pay corporate tax since the tax burden flows to you, the shareholder.

So does that mean like a partnership the partners are liable for the company's actions? Technically, yes. Has it happened before? No. Of course there are limitations to the liability, but are not definitely shielded in a way normal shareholders are.

MLPs issue a K-1 at the beginning of the year (feb/mar). The tax calculations are relatively complex and I'm not going to go over that in this post.

Generally MLPs are a bad choice for tax-deferred accounts like IRAs since there are tax implications beyond certain limits of distribution (yes even out of an IRA you'll have to pay taxes if above the limit).

Not all types of businesses can become MLPs (hey no corporate tax, let's form an MLP!) Only companies engaged in businesses related to real estate, commodities or natural resources can become MLPs.

There are a number of MLPs out there. The largest is Kinder Morgan Energy Partners.

Hope this helps!

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  • Note that in the case of Kinder Morgan, there is an investment vehicle Kinder Morgan LLC (KMR) which is suitable for investment in a tax-deferred account. KMR a holding company that uses a fractional split mechanism to pay "dividends" on the KMP MLP's distributions. It also has been trading at a discount to KMP for awhile now. – duffbeer703 Jan 12 '11 at 1:21
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I own a few MLPs that operate oil/gas pipelines (TSE:IPL-UN, NYSE:BPT, NYSE:APL), and I'm very happy with their performance. Because they don't pay corporate tax MLPs tend to pay higher dividends than most regular stocks. I pay H&R Block to do my taxes, and they sort out all the arcane details.

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MLP stands for master limited partnership. Investors who buy into one are limited partners, rather than shareholders, and have their taxable income reported on K-1s, rather than 1099s.

MLPs are engaged in businesses (e.g. real estate, natural resources) that generate a lot of cash that doesn't need to be "reinvested," or put back into the company.

Because of this feature, the IRS will exempt it from corporate tax if it pays out at least 95% of its income in the form of dividends. The advantage is that you avoid the "double taxation" common to most corporations, and get a higher yield as a result.

The disadvantage is that the company can't retain earnings for growth, and needs to borrow money if it wants to grow. In this regard, an MLP is much like a utility (except that a utility has to pay corporate taxes, and is otherwise heavily regulated by the Federal and/or state governments). You can look upon an MLP as an unregulated utility.

This means that MLPs are most suitable for utility type investors who are more interested in current income, than capital gains. Because they are unregulated, they are riskier than utilities.

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My question is: absent the corporate shield, to what extent are partners liable for a serious disaster or accident such as the BP Gulf incident. IN other words, if an oil pipeline had a major spill or explosion in which there were serious liabilities, to what extent would this effect the owners of a listed partnership beyond the effects of corporate liability on a common stock holding?

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  • The unitholders (ie. limited partners) have limited liability exposure. If there is a major pipeline disruption and the MLP subsequently issues a dividend, you may be liable to the extent of that dividend. – duffbeer703 Jul 18 '11 at 13:57
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    @DCJ Please re-post your question using the "Ask Question" link at the top left of the page. (You posted your question as an answer to another question instead.) – Chris W. Rea Jul 18 '11 at 15:26

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