Publicly-Traded Partnership - Explained
What is a Publicly-Traded Partnership?
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Table of ContentsWhat is a Publicly Traded Partnership?How Does a Publicly Traded Partnership Work?Investing in Publicly Traded Partnerships
What is a Publicly Traded Partnership?
In a business setting, a firm can be owned by a single individual, or a group of persons. A firm which is owned by a single person or partnership can either be traded on a private market or on a public market. A publicly traded partnership is any business institution, firm, or a company that is owned by two or more co-owners and traded regularly on a securities market. In a publicly-traded partnership, the owners can be two or more, and they can be private individuals, business entities, large corporations, or any other sort of partnership. Each of the general partners manages the partnership and the business organization is financed by limited partners who offer capital but have no say or very little say in how the firm is run. A PTP can offer investors quarterly income that are subject or eligible for favorable tax treatments, especially for businesses in the energy sector.
How Does a Publicly Traded Partnership Work?
A publicly traded partnership merges certain tax benefits of a limited partnership with the liquid nature of a publicly-traded security. This is made possible as the firm is more of a combination of a publicly-traded company and a limited liability corporation. PTPs are required by the U.S. Code to take part in certain businesses and practices, including businesses that have a relationship to natural resources, like petroleum, crude, and natural gas extraction, as well as the transportation of such natural resources. For a business entity to be qualified for publicly traded partnership status, a minimum of 90% of its assets must be funded from qualifying sources as outlined in the Internal Revenue Code Title 26, Subtitle F, Chapter 79. Qualifying sources in this case are stated exclusively and defined by the IRS in the Code. Usually, these qualifying sources include dividends, real estate property leases and rents, as well as gains from sales of tangible assets. Detailing it down, qualifying assets may also consist of income and gains that are generated from the exploration, examination, development, mining or manufacturing, processing or refining, transportation, or the marketing of any natural resource, mineral, or industrial source carbon dioxide. Transportation means can include pipelines and tankers, while natural resources which are deemed as qualifying sources can include fertilizer, timber, geothermal energy, and rubber. Another qualifying source is the transportation and storage of fuels like biodiesel and other similar and alternative fuels (recently added to the qualifying sources). Also, gains from the sales of a capital asset that has been used in the storage of transportation of fuel are also included into the qualifying sources. Finally, income and profits from financial markets like futures, options, commodities and commodities forwards, and common stocks are also included into the list of qualifying sources. Publicly Traded Partnerships (PTP) are able to avoid statutory corporate income tax at both State and Federal levels. However, in a case where the minimum benchmark of 90% income is not met, the partnership will have to take up the status of a corporation during tax periods, or for any tax purposes. Differences and Similarities between Publicly Traded Partnerships and Master Limited Partnership (MLP) It is possible to see even seasoned investors and business professionals mixing up master limited partnerships with publicly traded partnerships. While both systems are used to reference a publicly traded firm which decides to receive partnership treatments under tax regulations, there are also some minor but notable differences between them. Although it is hard to find them all, a number of master limited partnerships are not publicly traded (the larger numbers are actually publicly traded). In an MLP, each partner has a limited role and a different level of commitment, and the management follows this structure to the later. So each member of the partnership has what he or she does, the tasks they perform, and also have different amount of time that they are required to dedicate to the growth of the business establishment. On the other hand, not all publicly traded partnerships are master limited partnership, a number of them are actually limited liabilities corporations that have decided to update their status to PTPs in an attempt to receive the tax measure given to partnerships.
Investing in Publicly Traded Partnerships
According to the Internal Revenue Code, partnerships are exempt from taxes and are thus able to transfer a greater amount of their income over to investors compared to firms with the status of corporations. Partnerships usually pass on these income gains on a quarterly basis, unlike most statuses that transfer their earnings one per annum. It is possible to compare these quarterly payments to corporate dividends, however, they tend to receive a more favorable tax treatment. This is as a result of the treatment that is melted out on them, as these dividends are seen as return of capital to a partner (instead of income). This greatly reduces the partners basis with each payment that is sent. This way, investors can safeguard against tax losses and depreciations.