The shares that a commodity master limited partnership (MLP) issues are called units, and investors who own these units are known as unit holders. When you invest in an MLP, you’re essentially investing in a public partnership. This partnership is run by a general partner for his benefit and, more important, for that of the limited partners (which you become when you buy MLP units).
General partner
The main responsibility of the general partner (GP) is running the MLP. The GP isn’t always an individual. In fact, most GPs are actually other corporate entities set up for the specific purpose of running the MLP. These entities are sometimes set up in the form of corporations or limited liability companies (LLCs) and are often owned by an even larger corporation.
Limited partner
Although the general partner is responsible for managing the MLP, the limited partners bring in the capital that the MLP manages. To become a limited partner in an MLP, all you have to do is purchase units of that MLP on an exchange. After you purchase the MLP units, you are officially a limited partner in that MLP.
As a limited partner, you have virtually no say in how the partnership is managed, but you get to participate in the MLP’s cash flow distribution, which is probably the most important reason you want to own MLP units in the first place.
When you purchase MLP units, you can make money from two sources: quarterly cash flow distributions and appreciation of the unit price. Because units are publicly traded, they may appreciate in value as the partnership expands and grows over time. In addition, because the MLP is obligated to distribute all available cash back to its unit holders on a quarterly basis, your units generate quarterly income for you as well.
As a matter of fact, the MLP yields (the amount of cash distributed back to shareholders) are among the highest of any asset class, with an average yield of 6 percent. Some MLPs actually have yields as high as 10 percent! MLP yields are similar to stock dividends, except that they’re slightly more advantageous, thanks to the favorable tax treatment they enjoy.
The biggest drawback of being an LP is that you don’t get to make any decisions about where the partnership is heading. You essentially transfer power to the GP, who makes all operational decisions. However, because certain incentives are built into the MLP agreement, it is in the GP’s own interest to make sure that the MLP generates as much cash flow as possible.