Master limited partnerships (MLPs) are limited partnership entities that come with special advantages and publicly trade on a national securities exchange. The majority of MLPs are listed on the New York Stock Exchange (NYSE), although a number of MLPs are also listed on Nasdaq. Investors can gain an ownership stake in an MLP by purchasing or selling MLP units. Most commonly, MLPs are incorporated in the state of Delaware.

MLPs are focused on minerals and natural resources. For example, MLPs may be involved in the transport of commodities such as coal or propane, own pipelines that transport crude oil and natural gas, or engage in the exploration and production of crude oil and natural gas. Since the investments are concentrated in the energy sector, they can be sensitive to fluctuations in oil prices and commodity prices of certain natural resources.

An MLP typically has a two-tier structure. The upper tier entity is the publicly traded MLP, while the lower tier entity is the operating entity. The operating assets and operating subsidiaries of the MLP are owned by the lower tier operating entity. Meanwhile, the MLP can remain as a holding entity. Pursuant to the partnership agreement governing the MLP, the general partner has management authority over the business affairs of the MLP. The limited partners of the MLP are the public investors. Although the limited partners are liable for the debts of the MLP, the holding entity structure limits the extent of liability.

One unique feature of MLPs is that they are controlled by a sponsor. The sponsor is generally a public company that controls the general partner of the MLP. The sponsor appoints the general partner’s board of directors and contributes assets to the MLP. In addition to holding units in the MLP, the sponsor also typically holds incentive distribution rights (IDRs). IDRs provide the general partner with a greater share of the profits of the MLP after a predetermined threshold is hit.

For federal income tax purposes, an MLP is treated as a pass-through entity. In order to qualify for flow-through tax benefits, at least 90% of the MLP’s gross income must be “qualified income.” Qualifying income includes income derived from mineral and natural resource-related activities, such as the transportation, refining, exploration, production, and processing of natural resources. If the MLP fails to satisfy the 90% test, it will be required to pay corporate tax.

MLPs are traded on the basis of cash flow, rather than net income. The MLP promises to make minimum distributions to its investors on a quarterly basis based on its cash flows. This minimum distribution amount is set forth in the MLP’s prospectus document that is publicly filed with the Securities and Exchange Commission (SEC).

Examples of large MLPs traded on national stock exchanges include Brookfield Infrastructure Partners L.P., Magellan Midstream Partners, L.P., Western Midstream Partners, LP, and Viper Energy Partners LP.

Similar to a traditional IPO, newly formed MLPs go through an initial public offering process to become publicly traded. The IPO registrant has to file a Form S-1 registration statement for the MLP containing three years of audited financial statements and various disclosures about the MLP’s business operations.