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Master limited partnership (MLP) is a limited partnership that is publicly traded on a securities exchange. It combines the tax benefits of a limited partnership with the liquidity of publicly traded securities.

Master Limited Partnerships are limited by US Code to only apply to enterprises that engage in certain businesses, mostly pertaining to the use of natural resources, such as petroleum and natural gas extraction and transportation. Some real estate enterprises may also qualify as MLPs.

Some private equity management companies such as Blackstone Group (NYSE: BX) and Fortress Investment Group (NYSE: FIG) are structured as MLPs.

In practice, MLPs pay their investors through quarterly required distributions (QRD), the amount of which is stated in the contract between the limited partners (the investors) and the general partner (the managers). Failure to pay the QRD may constitute an event of default.

Because of such stringent provisions on MLPs, and the nature of the QRD, the vast majority of MLPs are pipeline businesses, which earn very stable income from the transport of oil, gasoline or natural gas.

Because MLPs are a partnership, they avoid the corporate income tax, on both a state and federal basis. Additionally, the limited partner (investor) may also record a pro-rated share of the MLP's depreciation on his or her own tax forms to reduce liability. This is the primary benefit of MLPs and gives MLPs relatively cheap funding costs.

However, this makes MLPs unattractive to tax-deferred funds, who must lose this tax saving advantage. To encourage tax-deferred investors, many MLPs set up corporation holding companies of LP claims which can issue common equity.

An example is the pipeline company Kinder Morgan Energy Partners. The main corporation is traded in the NYSE as KMI and is the operator of the pipelines and other assets. However, the pipelines themselves are owned by the MLP Kinder Morgan Energy Partners, L.P. (NYSE:KMP). Finally, part of KMP's limited partner interests are held by the corporation Kinder Morgan Management LLC (NYSE:KMR) which allows tax-deferred investors to participate in KMP's operations.

Usually, in the MLP structure, the general partner starts with a small (usually 2%) stake in the company but is given incentive distributions from net income after the QRD. Since these distributions are usually paid in the form of increased equity claims, over time, this allows the general partner to attain higher and higher percentage of ownership in the company.

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