Limited Partnership Unit (LPU)

What Is a Limited Partnership Unit (LPU)?

A limited partnership unit, or LPU, is an ownership unit in a publicly traded limited partnership, or master limited partnership (MLP). This trust gives the unit holder a stake in the income generated by the partnership company. A limited partnership unit is likewise alluded to as a master limited partnership unit or a limited partner unit.

How a Limited Partnership Unit Works

A limited partnership unit is a share certificate addressing one unit of ownership in a master limited partnership (MLP). In this way, a MLP is just a limited partnership that is publicly traded on an exchange. A MLP frequently disseminates all suitable cash (like dividends) from operations to unit holders after the deduction of maintenance capital.

Partnership units are beneficial to investors in light of the fact that the MLP permits the company's cash distributions to dodge the double taxation that would ordinarily be forced, which generally means greater distributions for partnership unitholders. In a MLP, the cash distributions of the company are taxed exclusively at the unit holder level and not at a corporate level.

A limited partnership is a flow-through entity and is consequently not a legal taxpaying entity.

An investor that purchases an interest in a limited partnership shares the profits or losses of the business pro-rata with different partners and owners. For tax purposes, an owner or investor incorporates a percentage of the business' gains or losses while calculating their own taxable income. Partners are then required to report this income or loss, paying little mind to genuine distributions from the partnership.

Special Considerations: Liability

The liability with respect to the partnership's obligations is limited as each partner or investor can lose up to their original investment. Limited partnerships generally must mail an IRS Schedule K-1 to every one of their unit holders consistently.

In spite of the fact that partnerships make quarterly cash distributions to LP unitholders, these distributions are not guaranteed. In any case, each unitholder is responsible for the taxes on their proportionate share of income, even on the off chance that the partnership doesn't make a distribution.

Benefits of Limited Partnership Units

Notwithstanding the avoidance of double taxation, one more benefit of investing in LP units is that in light of the fact that the units are publicly traded, there is significantly more liquidity for investors compared to a traditional partnership. Generally speaking, these limited partnership unit investments are eligible as IRA and RRSP investments. LP units are concentrated in the real estate sector or in the commodities and natural resource sectors like oil, natural gas, timber, and petroleum.

The at-risk rules apply to limited partners. These are special rules that prevent investors from writing off more than the amount they invested in limited partnership units. In effect, the at-risk rules limit the amount of loss the limited partners can claim to the amount of real at-risk capital.

In the event that an investor's adjusted cost base (ACB) — the amount paid for the units — of their LP units is negative, they are considered to have caused a capital gain and their adjusted cost base will to be reset to zero. On the off chance that their ACB in a future year is positive, they might decide to perceive a capital loss on the positive ACB and apply this loss against the previous capital gain to recuperate tax paid on that amount.

Features

• LPUs are not subject to double taxation and are viewed as by the IRS to be a flow-through entity.
• Liability for LPUs is capped at the amount of the original investors' capital investment.
• Limited partnership units, or LPUs, are ownership units in a publicly traded limited partnership, or master limited partnership (MLP).