MLP Definition
Master Limited Partnership (MLP) — Definition and Complete Guide
A Master Limited Partnership (MLP) is a business structure used primarily in the energy and natural resources sector. It combines the legal characteristics of a partnership with the trading liquidity of a publicly listed company. In practical terms, an MLP is a publicly traded partnership whose units can be bought and sold on stock exchanges, just like regular shares.
At a basic level, MLPs operate large-scale, capital-intensive infrastructure such as oil and gas pipelines, storage facilities, transportation networks, and in some cases, processing plants. These assets tend to generate stable, predictable cash flows, which is why MLPs are popular among income-focused investors. Most of the revenue comes from long-term contracts rather than commodity prices, making some MLPs less sensitive to fluctuations in oil or gas markets. However, it’s important to note that they are not without sector-specific risks, including regulatory/political challenges for new projects and volume risk tied to the long-term demand for the commodities they transport.
The appeal is straightforward: MLPs typically offer high cash distributions, often higher than most traditional dividend-paying companies (yields commonly 7-9% as of late 2025). They benefit from a pass-through tax structure, meaning they do not pay corporate income taxes at the entity level. Investors (called “unitholders”) receive periodic cash payments similar to dividends, but formatted differently for tax purposes. This makes MLPs attractive for anyone seeking consistent income, especially in portfolios targeting over 10% overall yield. However, they also come with unique complexities that new investors should understand.
How an MLP Works: Structure and Participants
An MLP is generally composed of two key actors:
General Partner (GP): The GP manages the operations of the MLP. Historically, GPs also received “Incentive Distribution Rights” (IDRs), allowing them to take a larger share of incremental cash flows. Many modern MLPs have bought out their IDRs to better align GP and unitholder interests and simplify the distribution structure.
Limited Partners (LPs): These are the regular investors — people who buy MLP units on the stock market. LPs provide the capital but do not manage the business. In exchange, they receive quarterly cash distributions.
MLPs must earn at least 90% of their income from qualifying natural resource or infrastructure activities to maintain their special tax status. This is why the vast majority are in the midstream energy sector (pipelines, terminals, storage).
Tax Considerations: The Complex Part
The taxation of MLPs is where things become both interesting and complicated.
Instead of receiving a standard dividend statement (like a 1099-DIV in the US), MLP unitholders receive a K-1 tax form. This form reports each unitholder’s share of the partnership’s income and expenses, depreciation, interest deductions, and return of capital.
The most important aspect for investors outside retirement accounts is that distributions are often treated as return of capital (ROC). This means the distributions themselves are not immediately taxed — instead, they reduce the investor’s cost basis. Taxes are only owed when units are sold, often resulting in long-term capital gains. This deferral is a major attraction of MLPs, but it requires careful record-keeping. A key additional complexity for U.S. investors is state-level tax filing obligations. Because the income is pass-through, an investor may be required to file tax returns in every state where the MLP has significant operations, even if they don’t reside there, often increasing tax preparation complexity and cost.
MLPs in Retirement Accounts (IRAs): UBTI Risk
Holding MLPs in a US retirement account introduces the concept of Unrelated Business Taxable Income (UBTI). If the total UBTI received exceeds $1,000 per year, the retirement account may owe taxes. For this reason, many brokers discourage holding MLPs inside IRAs. Instead, investors often prefer MLP-structured ETFs or ETNs, which simplify tax reporting but may lose some tax-deferral benefits.
Special Considerations for Non-US Investors
MLPs are even more complex for non-US investors (common in global income portfolios). They generate pass-through income, and the tax liability is based on the fund’s business activities, not a simple dividend.
The major hurdle: They can create a US tax filing obligation (via a K-1 form) and may generate “Effectively Connected Income (ECI),” which is subject to higher, business-level taxation for non-residents (up to 37% for individuals). Distributions often face withholding taxes of 30-37%, not always reduced by tax treaties. Many non-US investors avoid direct MLPs and opt for ETFs (like AMLP) for simpler 1099 reporting, though with slightly lower deferral benefits.
See the Dividend Withholding Tax by Country table in the Toolbox for US rates on PTPs/MLPs.
Real-World Examples of MLPs (as of Late 2025)
Some of the most established and widely held MLPs include:
Enterprise Products Partners (EPD) → A large midstream operator with pipelines, natural gas liquids networks, and storage systems. Known for strong distribution safety and no IDRs. Yield around 6.8%, with 27+ years of distribution growth.
Energy Transfer (ET) → One of the highest-yielding MLPs, owning one of the largest pipeline networks in North America. Popular among income investors. Yield around 8.1-8.2%.
MPLX → Sponsored by Marathon Petroleum, focused on logistics and processing. Yield around 7.8-7.9%, with recent growth in distributions.
These companies generate the bulk of their revenue from volume-based fees, not oil prices, which makes their cash flows more stable than most energy producers. Compare to REITs or covered-call ETFs (e.g., JEPQ) in the Incomopedia for alternatives.
Final Thoughts
MLPs can be an excellent source of high, tax-advantaged income, but require more understanding than traditional dividend stocks. They are best suited for investors who:
seek strong, steady distributions, are comfortable with K-1 tax reporting (or use ETFs for simplification), and understand the sector’s regulatory and operational dynamics.
For income-focused portfolios — particularly outside retirement accounts — MLPs remain one of the most powerful income tools available, especially when combined with global strategies. Investors should, however, remain mindful of their fiscal complexity.
MLP Definition – useful links
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