What is a limited partnership unit (LPU)?
A limited partnership unit, or LPU, is a unit of ownership in a publicly traded limited partnership, or a master limited partnership (MLP). This trust gives the unit holder a share of the income generated by the general partnership. A limited partnership unit is also called a main limited partnership unit or a limited partner unit.
Operation of a limited partnership unit
A limited partnership unit is a share certificate representing a unit of ownership of a master limited partnership (MLP). Thus, an MLP is nothing more than a limited partnership that is listed on the stock exchange. An MLP often distributes all available cash (such as dividends) from operations to unitholders after deduction of maintenance capital.
Limited partnership units are advantageous for investors because the MLP allows the company’s cash distributions to bypass double taxation that would normally be taxed, which generally means greater distributions for holders of limited partnership units . In an MLP, corporate cash distributions are only taxed at the unit holder level and not at the corporate level.
A limited partnership is an intermediary entity and is therefore not a legal taxpayer entity.
An investor who buys an interest in a limited partnership shares the profits or losses of the business pro rata with other partners and owners. For tax purposes, an owner or investor includes a percentage of the business’s gains or losses when calculating their own taxable income. Partners are then required to report this income or loss, regardless of the actual distributions from the partnership.
Special considerations: liability
Liability for partnership debts is limited because each partner or investor can only lose their initial investment. Limited partnerships must generally send an IRS Schedule K-1 to each of their unit holders each year.
Although partnerships pay quarterly cash distributions to SEC unitholders, these distributions are not guaranteed. However, each unitholder is responsible for taxes on their proportional share of the income, even if the partnership does not distribute.
Benefits of Limited Partnership Units
In addition to avoiding double taxation, another advantage of investing in SEC units is that because the units are listed on the stock exchange, there is much more liquidity for investors compared to a traditional partnership. In most cases, these investments in limited partnership units qualify as IRA and RRSP investments. LP units are concentrated in the real estate sector or in the raw materials and natural resources sectors such as petroleum, natural gas, wood and petroleum.
The rules at risk apply to sponsors. These are special rules that prevent investors from writing off more than the amount they have invested in limited partnership units. In fact, the risky rules limit the amount of losses that the limited partners can claim to the amount of real risk capital.
If an investor’s adjusted cost base (ACB) – the amount paid for the units – of their LP units is negative, they are deemed to have realized a capital gain and their adjusted cost base will be reset to zero. If their ACB in a future year is positive, they can choose to recognize a capital loss on the positive ACB and apply this loss to the previous capital gain to recover the tax paid on this amount.
Key points to remember
- LP Units, or LPUs, are ownership shares of a publicly traded limited partnership or a master limited partnership (MLP).
- LPUs are not subject to double taxation and are considered by the IRS to be an intermediary entity.
- The liability of LPUs is limited to the amount of the capital investment of the initial investors.