Drawbacks of Master Limited Partnerships
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Drawbacks of Master Limited Partnerships
Investors should consider the downsides to master limited partnerships (MLPs), which include the following:
Personal tax liability
Each unitholder is responsible for paying his or her share of the partnership’s income taxes, which can make filing taxes more complicated. This is particularly true for larger unitholders, who may have to pay taxes in the various states in which the partnership operates. Moreover, limited partners might owe taxes on partnership income even if the units are held in a retirement account.
Things To Know
- Each unitholder is responsible for paying his or her share of the partnership’s income taxes.
Limited pool of investors
MLPs face a smaller pool of potential investors than traditional equities because institutional investors, such as pension funds, are not allowed to hold MLP units without incurring tax liability. These large investors do not ordinarily pay taxes, so they tend to shy away from MLPs.
Institutional investors represent the majority of investor dollars in the market, so eliminating them reduces the potential demand for MLP units. Congress recently approved a provision allowing mutual funds to buy MLPs, which should dramatically increase the number of potential investors.