Publicly Traded Partnership (PTP) Definition, How It Works

What Is a Publicly Traded Partnership (PTP)?

A publicly traded partnership (PTP) is a business organization owned by two or more co-owners whose shares are regularly traded on an established securities market. A publicly traded partnership is a type of limited partnership managed by two or more general partners—including individuals, corporations, or other partnerships—and is capitalized by limited partners who provide capital but have no management role in the partnership.

A publicly traded partnership is similar to a master limited partnership (MLP); however, there are minor differences. PTPs, mostly in energy-related businesses, can offer investors quarterly income that receives favorable tax treatment.

Understanding Publicly Traded Partnerships

A publicly traded partnership combines certain tax benefits of a limited partnership with the liquidity of a publicly traded security. Publicly traded partnerships must engage in certain types of business as stipulated in the U.S. Code, including businesses related to the use of natural resources, such as petroleum and natural gas extraction and transportation.

To qualify for publicly traded partnership status, 90% of the partnership's income must come from "qualifying" sources as outlined in the Internal Revenue Code Title 26, Subtitle F, Chapter 79. Generally, those qualifying sources include interest, dividends, real property rents, and any gain from the sales and disposition of real property.

More specifically, qualified income also includes any "income and gains derived from the exploration, development, mining or production, processing, refining, transportation (including pipelines transporting gas, oil, or products thereof), or the marketing of any mineral or natural resource (including fertilizer, geothermal energy, and timber), [or] industrial source carbon dioxide."

Also included is any revenue from transportation or storage of fuels, including biodiesel and other alternative fuels, any gain from the sale or disposition of a capital asset, and any income and gains from specific commodities and commodity forwards, futures, and options.

Publicly Traded Partnerships vs. MLPs

The terms "master limited partnership" and "publicly traded partnership" are used interchangeably about a publicly traded company that chooses to be treated as a partnership under tax regulations. However, there are some minor differences. Not all MLPs are PTPs because some are not publicly traded (though most are).

An MLP represents a tiered limited partnership structure that may have different roles and levels of commitment for each partner (one partner may manage the partnership while another may contribute capital). And not all PTPs are MLPs; some could be publicly traded limited liability companies (LLC) that have decided to be taxed as a partnership.

Investing in Publicly Traded Partnerships

As a partnership, PTPs do not pay tax and are, therefore, able to pass more of their income—via quarterly cash distributions—to investors compared to corporations. These payments may resemble corporate dividends but are taxed differently (more favorably). This is because they are treated as a return of capital to the partner (rather than income) and thus reduce the partner's basis with each distribution. This allows for the use of depreciation and tax losses.