Forming a Master Limited Partnership

How a Master Limited Partnership is Formed

An MLP is structured as a publicly-traded limited partnership that owns the operating company which in turn acquires assets.  An MLP is managed at the partnership level by a General Partner (GP) or Sponsor who takes the lead on managing the MLP, essentially operating the business.  A master limited partnership is formed through a multi-step process, involving a lot of paperwork from well-paid attorneys, but it essentially boils down to:

  1. The Sponsor forms the General Partner (GP);
  2. The Sponsor and the GP form the limited partnership, setting up the partnership agreement that dictates the distribution levels;
  3. The Sponsor invests a nominal amount of money in the limited partnership;
  4. The Sponsor then contributes the qualifying assets to the master limited partnership; the assets must meet the requirements for MLPs on qualifying sources of income, per 7704(d)(1)(E);
  5. The MLP now assumes the liabilities for those qualifying assets and the assets and liabilities are moved down to the operating subsidiaries;
  6. In the IPO, common units (essentially public shares) are offered to the public;
  7. The GP typically maintains a 2% interest in the MLP
  8. The Sponsor or GP receives cash, common units, subordinated units, and incentive distribution rights (to be covered in more detail next);
  9. Now that the MLP has been formed, the GP works to generate cash flow and greater distributions to unit holders and the GP itself.[1]

The GP will sell a portion of the MLP to the public in an Initial Public Offering (IPO) and the remainder will be owned by the GP, as well as a 2% interest.

The pubic buys common units in the MLP while the GP holds subordinated units, giving the public preference over the GP when it comes to cash distributions.  As the MLP prepares for IPO, it will submit its prospectus to the SEC and set a minimum quarterly distribution, which the public will receive first, then the GP’s subordinated units.

[1] Paul Hastings.


tags: how to form a master limited partnership, forming a master limited partnership, what is a MLP, how does an MLP work, MLPs, master limited partnerships, midstream MLPs

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