What Is a Limited Partnership Unit (LPU)?
Let me explain what a limited partnership unit, or LPU, really is—it's an ownership unit in a publicly traded limited partnership, which we often call a master limited partnership (MLP). When you hold one of these units, you're getting a direct stake in the income that the partnership generates. You might also hear it referred to as a master limited partnership unit or simply a limited partner unit.
How a Limited Partnership Unit Works
Think of a limited partnership unit as a share certificate that gives you one unit of ownership in a master limited partnership (MLP). Essentially, an MLP is just a limited partnership that's traded publicly on an exchange. These entities typically distribute all their available cash from operations—things like dividends—to unit holders, but only after they've deducted what's needed for maintenance capital.
One key advantage for you as an investor is how MLPs handle taxes; they let the company's cash distributions avoid the double taxation you'd see in a regular corporation, which translates to potentially larger payouts for you. In an MLP setup, those distributions get taxed only at your level as the unit holder, not at the corporate level.
Important Tax and Ownership Details
Remember, a limited partnership operates as a flow-through entity, meaning it's not a separate taxpaying entity under the law. If you buy into one, you'll share the profits or losses pro-rata with other partners and owners. For your taxes, that means including a percentage of the business's gains or losses in your own taxable income calculation. You'll have to report this income or loss on your returns, even if the partnership hasn't actually distributed any cash to you.
Special Considerations: Liability
On the liability side, your exposure to the partnership's debts is strictly limited—you can only lose up to the amount of your original investment. Limited partnerships are required to send you an IRS Schedule K-1 each year as a unit holder.
While these partnerships often make quarterly cash distributions to you as an LP unitholder, those aren't guaranteed. Importantly, you're still on the hook for taxes on your proportionate share of the income, regardless of whether any distribution actually comes through.
Benefits of Limited Partnership Units
Beyond dodging double taxation, investing in LP units gives you strong liquidity because they're publicly traded, unlike traditional partnerships. In many cases, these investments qualify for IRAs and RRSPs. You'll find LP units mostly in sectors like real estate or commodities and natural resources, such as oil, natural gas, timber, and petroleum.
Keep in mind the at-risk rules that apply to you as a limited partner—these prevent you from writing off more losses than what you've actually invested. Basically, they cap your claimable losses at your at-risk capital amount.
If your adjusted cost base (ACB)—that's the amount you paid for the units—goes negative, it's treated as a capital gain, and your ACB resets to zero. Later, if it turns positive, you can recognize a capital loss on that amount and use it to offset the earlier gain, recovering any tax you paid.
Key Takeaways
- Limited partnership units, or LPUs, are ownership units in a publicly traded limited partnership, or master limited partnership (MLP).
- LPUs are not subject to double taxation and are considered by the IRS to be a flow-through entity.
- Liability for LPUs is capped at the amount of the original investors' capital investment.
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