Master Limited Partnerships have gained in popularity in recent years, particularly in the midstream oil & gas sector, and now excitement is building around using the MLP structure for renewable energy projects. But MLPs are better suited to some assets than others and launching one is a complicated endeavor. So is an MLP the right fit for your business?

The tax and accounting experts at Ernst & Young have been getting this question so frequently from their clients, they conducted a webcast designed to highlight the challenges and potential benefits associated with launching an MLP.

An MLP is defined and explained by Investopedia as:

“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 MLP often distributes all available cash flow from operations to unit holders after the deduction of maintenance capital.”

“Partnership units are beneficial to investors because the MLP allows the company’s cash distributions to circumvent the double taxation that would normally be imposed, which generally means greater distributions for partnership unit holders. In an MLP, the cash distributions of the company are taxed only at the unit holder level and not at a corporate level. Another benefit of this type of investment is that because the units are publicly traded, there is much more liquidity for investors compared to a traditional partnership.”

Part of the interest on behalf of E&Y’s client base stems from the fact that  over the past 7-10 years, traditional companies were often outbid of M&A deals by MLPs with lower cost of capital and lower tax burdens, they said on the webcast.

Companies will look at this and say I want to do it, the analysts said, but not all markets can handle an influx of new MLPs. At the same time, MLPs need to align with long-term strategic business goals, and just because the model has proven successful in certain cases, does not mean it’s the right investment for every business or business segment.

The accountants also cautioned taking an MLP through an initial public offering is a major process that requires considerable front-end analysis or “proof of concept” because numerous esoteric accounting treatments tangle the path toward an MLP IPO.

“There is lots of heavy lifting that can be done on the front end so you can do your day job during the MLP IPO process.”

“Even though classified as an IPO, this is pretty specialized.”