Publicly Traded Partnership
What it is:
How it works/Example:
Typically, a publicly traded partnership is a partnership between the limited partners who provide the capital (or at least the initial capital) for the company and the general partners who manage the company. The partnership publicly sells limited partnership shares in the company, offering the equivalent of equity and dividends of a publicly traded company. The limited partnership shares are traded in the capital market.
IRS rules regarding publicly traded partnerships restrict such organizations to limited partnership involved primarily (over 90% of its income) in real estate, energy, including alternative energy fuels and transportation, and commodities.
Why it matters:
A publicly traded partnership combines the tax advantages of passing along the tax liabilities to partners when distributions are made and the liquidity of a publicly traded company. For tax purposes, the distributions of income/dividends to limited partners is not treated as taxable income, but rather as a return of capital which reduced the partner's basis (the original price paid for the limited partnership shares). As a result, upon sale of the shares, the tax is on the difference between the sales price and the adjusted basis (i.e., purchase price minus returned capital).