Master Limited Partnerships

MLPs, what are they, and do they make sense for Doctors to Invest In?

7/28/20232 min read

Master Limited Partnerships (MLPs) are a type of business structure that combines the tax benefits of a partnership with the liquidity of publicly traded securities. They are typically found in the energy and natural resources industries, particularly in the oil and gas sector. MLPs are required by law to generate most of their revenue from qualifying activities related to natural resources, such as the transportation, storage, processing, and production of oil, gas, or minerals.

Here are some key features of MLPs:

  1. Tax Advantages: MLPs are pass-through entities, which means they do not pay corporate income taxes. Instead, the income generated by the MLP is distributed to its unitholders (investors) in the form of distributions. This can be advantageous for investors since they can potentially avoid double taxation.

  2. Limited Partners and General Partners: MLPs have two types of partners: limited partners (investors) and general partners (the managing entity). Limited partners have a stake in the MLP's profits and losses but typically have no voting rights. General partners, on the other hand, have control over the MLP's operations and are responsible for managing the business.

  3. Distribution Yield: MLPs are known for their high distribution yields, making them attractive to income-seeking investors. However, it's essential to note that these distributions may be subject to taxes, and the tax reporting for MLPs can be more complex than traditional investments.

  4. Price Volatility: MLPs can be subject to price fluctuations, similar to other publicly traded securities. Their performance can be influenced by factors such as commodity prices, interest rates, and economic conditions.

How to Invest in MLPs:

Investing in MLPs can be done through various means:

  1. Direct Investment: You can purchase MLP units through brokerage accounts, just like you would buy stocks. However, investing directly in MLPs requires understanding the tax implications and complexities associated with MLP ownership. As such, consulting with a financial advisor or tax professional is recommended.

  2. MLP Mutual Funds or ETFs: To avoid some of the tax complexities of direct ownership, you can invest in MLP-focused mutual funds or exchange-traded funds (ETFs). These funds hold portfolios of MLPs, allowing investors to gain exposure to a diversified group of companies. The funds handle the tax reporting on behalf of the investors.

  3. MLP CEFs (Closed-End Funds): MLP CEFs are similar to mutual funds, but they have a fixed number of shares. They can trade at a premium or discount to their net asset value (NAV), depending on investor demand.

  4. MLP ETNs (Exchange-Traded Notes): ETNs are debt instruments tied to the performance of an underlying index. Investing in MLP ETNs exposes investors to the performance of MLPs without direct ownership.

It's essential to conduct thorough research and understand the risks associated with MLP investments before making any decisions. MLPs can be complex, and their tax implications may not be suitable for all investors. Consulting with a financial advisor who has experience with MLPs can help you determine if they align with your financial goals and risk tolerance.

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