Corporate Restructuring and the Master Limited Partnership

Abstract

This note defines and discusses the concept of the Master Limited Partnership (MLP). Special attention is given to the economic analysis of MLPs: tax-related inducements, nontax benefits, attributes of firms likely best to exploit these benefits, cost benefit analysis, and a brief review of evidence about spin-offs.

Excerpt

UVA-F-0723

CORPORATE RESTRUCTURING AND THE

MASTER LIMITED PARTNERSHIP

A master limited partnership (MLP) is a limited partnership organized around certain operating assets. The MLP shares, or “units,” are generally traded on a national exchange, which thus affords investment liquidity. The MLP is operated by a general partner whose legal liability is unlimited. Ordinary investors are limited partners who have a claim on the partnership's cash flows but no say in its management and only limited liability. Because it is organized as a partnership, the operating cash flows are taxed at only one level (i.e., the personal level). The Internal Revenue Service recognizes MLPs as partnerships for tax purposes if no more than two of the following questions can be answered affirmatively:

· Does the partnership have continuity of life?

· Is there centralized management?

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Keywords: inancial management, financial policy, liability management, restructuring, security analysis, tax issues