A master limited partnership (MLP) is a limited partnership whose interests (known as “units”) are traded on public exchanges, just like corporate stock. MLPs engage in active businesses, primarily in the energy industry. There are a number of publicly traded partnerships which are not active businesses and are instead investment funds, in particular commodity pools; these are not considered MLPs.
A limited partnership has one or more general partners (i.e. individuals, corporations, or other partnerships) who manage the partnership; it also has limited partners, who provide capital to the partnership but have no role in its management. When an investor buys units in an MLP, he or she becomes a limited partner.
MLPs are formed in several ways: (a) nontraded partnership may decide to go public; (b) several nontraded partnerships may “roll up” into a single MLP; (c) a corporation may spin off a group of assets or part of its business into an MLP in which it retains an ownership interest, either to realize the assets’ full value on the marketplace or as an alternative to debt; (d) a corporation may fully convert to an MLP (however, since 1986, the tax consequences have made this an unappealing option for most); or (e) a newly formed company may operate as an MLP from its inception.