Limited Partnership Unit (LPU)

Limited Partnership Unit (LPU)

A limited partnership unit (LPU) is an ownership interest in a publicly traded limited partnership, commonly known as a master limited partnership (MLP). Each unit represents a pro rata claim on the partnership’s income and cash distributions.

How LPUs work

• An MLP is a limited partnership whose ownership units trade on public exchanges.
• LPUs entitle holders to a share of the partnership’s operating cash flow, typically distributed periodically after the partnership deducts maintenance or capital requirements.
• LPUs are issued instead of corporate shares; the partnership itself generally does not pay corporate income tax.

Tax treatment

• LPUs are flow-through entities: income, gains, losses, deductions and credits pass through to unit holders and are reported on their tax returns.
• Because the partnership is not taxed at the entity level, LPUs avoid the double taxation that affects conventional corporations (corporate tax plus shareholder tax on dividends).
• Unit holders receive a Schedule K-1 that details their share of the partnership’s taxable items; they must report those items whether or not the partnership actually distributed cash.
• Many LPUs can be held in tax-advantaged accounts (IRA, RRSP), but tax consequences can vary—confirm eligibility and implications with a tax advisor.

Liability and distributions

• Limited partners’ liability is generally limited to the amount they invested in the partnership.
• Distributions are typically made regularly but are not guaranteed. Even if no cash is distributed, unit holders remain responsible for taxes on their allocated share of taxable income.

Special rules and investor considerations

• At-risk rules restrict how much loss a limited partner can claim to the amount of their actual at-risk capital invested in the partnership.
• Adjusted cost base (ACB) mechanics:
• If a unit holder’s ACB becomes negative, the negative balance is treated as a capital gain and the ACB is reset to zero.
• If the ACB later becomes positive, the unit holder may be able to recognize a capital loss and apply it against the previously recognized gain, subject to tax rules.
• LPUs usually issue Schedule K-1s annually, which can complicate tax filing and timing.

Benefits

• Avoidance of double taxation at the entity level.
• Public trading provides greater liquidity than traditional private partnerships.
• Attractive for investors seeking exposure to sectors that commonly use the MLP structure (natural resources and real assets).

Typical sectors

MLPs and LPUs are concentrated in industries that generate steady cash flow and require significant capital investment, such as:
* Energy (oil and natural gas pipelines, midstream services)
Timber and forest products
Real estate and infrastructure (in some cases)

Key takeaways

• An LPU is a tradable ownership unit in a publicly traded limited partnership (MLP).
• LPUs are flow-through interests: taxable items pass through to unit holders, and the partnership itself generally is not taxed.
• Liability for limited partners is typically limited to their invested capital.
• Distributions can be attractive but are not guaranteed, and unit holders must report their share of partnership income for tax purposes even if no cash is received.
• Special tax rules (Schedule K-1, at-risk rules, ACB adjustments) can affect tax reporting and outcomes.