Investors should also consider the downsides to MLPs, which include:
Personal Tax Liability. Each unitholder is responsible for paying his or her share of the partnership's income taxes, which can make filing taxes more complicated. This is particularly true for larger unitholders, who may have to pay taxes in the various states in which the partnership operates. Moreover, limited partners might owe taxes on partnership income even if the units are held in a retirement account.
Limited Pool of Investors. MLPs face a smaller pool of potential investors than traditional equities because institutional investors, such as pension funds, are not allowed to hold MLP units without incurring tax liability. These large investors do not ordinarily pay taxes, so they tend to shy away from MLPs.
Institutional investors represent the majority of investor dollars in the market, so eliminating them reduces the potential demand for MLP units. Congress recently approved a provision allowing mutual funds to buy MLPs, which should dramatically increase the number of potential investors.
Benefits of Royalty Trusts >>