Understanding Master Limited Partnerships and Its Benefits of Investing In Them
There are many ways in which a business organization can be formed. It can be a sole proprietorship, partnership, publicly traded, etc. One such type of business organization is Master Limited Partnership (MLP). A MLP is a type of business organization which exists in the form of publicly traded limited partnership. In such type of organization, there are two classes of partners, namely, limited and general partners. Limited partnersare those who simply invest in the organization and provide the capital in exchange of a return whereas general partners are responsible for the day to day operations and receive compensation based on the performance. MLPs are commonly present in the energy industry and even have indices based on their market, for Alerian MLP Index is the leading gauge of energy MLPs.
There are many investors who invest in MLP. MLP investing has its own benefits. Some of them include-
- High Yield – Most MLPs provide a generous yield generally falling in the range if 6%-7%.
- Consistent Distributions over the Year- Many MLPs are stable in running their operations and produce consistent cash flows year after year, making distributions of MLP units very predictable.
- Capital Gains- Usually investors switch to MLP in order to gain tax benefits. Owners of partnerships are only taxed once. When the limited partners get their return on capital, it is taxed at the capital gain rate when they sell these units. The tax is deferred till the time the owners decide to sell and it lower than the income tax rate. Moreover, unlike other energy companies, MLP do not take exposure in commodities giving lesser risk and volatility to investors.
- Lower Cost of Capital – Since taxes are absent at the company level, MLPs have a lower cost of capital than any other corporation which allow MLPs to invest in more projects.
Thus, MLPs are one of the attractive investment options available to an investor. Of course, like any other investment class, even MLPs have their share of risk. Therefore, it is highly important that an investor does a proper analysis of the MLP organization before investing.