Publicly Traded Partnerships (PTPs) have gained a lot of prominence in recent years. Apart from their distinct tax advantages and risk profiles, they are also very lucrative investments in themselves. For investors who are looking to navigate the complexities of modern finance, gaining an understanding of PTPs is crucial.
In this article, we’re going to explore what PTPs are, why they are important, and whether it should be an integral part of your investment portfolio.
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What is a PTP?
A PTP, also sometimes known as a “Master Limited Partnership” (MLP), is a unique tax structure. They’re mostly used in the energy and real estate sectors, although they’re certainly not limited to these industries.
They’re investment vehicles that combine the features of a partnership and a publicly traded company. This opens a way for investors to participate in the profits generated by the partnership’s assets.
At the core level, PTPs are a form of business structure where two or more entities come together to run a business. These structures have unique features that differentiate them from stocks, bonds and other traditional investments in the form of tax breaks, risk profile, liquidity, ownership structure, governance, control over investment, and complexity.
How do Publicly Traded Partnerships (PTPs) work?
Since PTPs are essentially businesses, investments into PTPs are investments into the income generated by the underlying business, which makes them different from traditional corporations. Here’s how they work:
- Structure – PTPs consist of two types of partners: general and limited. General partners are responsible for the company’s day-to-day operations. They are also responsible for the lion’s share of the company’s liability. However, limited partners only invest capital in the company without assuming liability risk.
- Income – The income generated by the PTPs goes directly to the limited partners. Individual taxes are paid by each party, no corporate taxes are paid by the company.
- Distributions – PTP investments are lucrative because most income generated by the company is passed on to limited partners in the form of periodic cash distributions. They’re considered capital returns and are hence tax-advantaged.
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Upsides and downsides
Here are the pros and cons of investing in Publicly Traded Partnerships:
Pros
- Tax advantages – Since profits from the company are directly passed-through to limited partners, investors can enjoy tax-deferred income and a reduction in their overall tax liability. PTPs are, hence, a great option for investors looking to make regular incomes from their investments.
- Medium to high yields – PTPs are considered to be medium to high-yield investments, especially if these companies are based in the energy sector.
- Liquidity – Since PTPs, by definition, are traded on major stock exchanges, they offer you flexibility in buying and selling shares compared to private companies.
Cons
- Tax complexities – Although PTPs do offer tax breaks to investors in a way, they also make the tax reporting process a lot more complicated. Please be advised that if you’re investing in a PTP, you must be ready to deal with additional tax filing requirements.
- Risk exposure – You must pick your PTP investments very carefully. Since all your investment returns are made only when the company makes profits, the extra time you put in to fundamentally analyse your company is completely worth it.
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Conclusion
We hope that reading this article reinforced your understanding of what PTPs are and whether or not to invest in them. Just like with any other investment vehicle, PTPs also come with their own risks and advantages. Hence, we encourage you to identify your risk appetite and invest in PTPs accordingly.
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