USING MLPS, CORPORATIONS, AND UP-CS AS EXIT VEHICLES
ELIZABTH MCGINLEY, BRACEWELL LLP, NEW YORK CITY
THERE ARE several structures that can be utilized to effect a
public offering of a private business engaged in the energy industry. Those most commonly considered are the master limited
partnership (MLP), the traditional corporate structure, and the
umbrella partnership, or UP-C, structure.
Generally, for federal income tax purposes, operating as a
partnership is preferred to operating as a corporation because
partnership income is subject to federal income tax only once, at
the partner level, whereas, income of a public corporation is subject
to federal income tax twice, first when earned by the corporation,
and again at the stockholder level when a dividend is paid or gain
is recognized on the sale of stock. However, there also are disadvantages to operating in partnership form. Partnerships generally
cannot be publicly traded and retain a single level of federal income
taxation, unless the partnership qualifies as an MLP.
THE MASTER LIMITED PARTNERSHIP
MLPs generally are formed by a sponsor as publicly traded limited
partnerships. An existing private business can be contributed
to the MLP in exchange for equity of the MLP on a tax deferred
basis, resulting in a carry-over tax basis in the assets of the
business. The MLP structure is best suited for the contribution
of a private business operated in partnership form, or as a limited
liability company (LLC) treated as a partnership for federal in-
come tax purposes, so all of the operations can continue in
partnership form. If the existing business were held in corporate
form, the liquidation of the corporation, or conversion to a
partnership, would result in the recognition of any unrealized
appreciation and taxable gain at the corporate and stockholder
In exchange for the contribution, the sponsor typically receives
general partnership interests, incentive distribution rights which
are similar to a carried interest, and subordinated or common
units. The public subscribes for listed limited partnership interests, or common units, in exchange for cash.
Generally, publicly traded partnerships are treated as corporations for federal income tax purposes, so that the taxable income generated is subject to two levels of federal income tax.