Limited Partnerships
Purchasing a limited partnership interest enables an investor to
own a portion of a business enterprise in much the same way that buying shares
of stock makes an investor a part-owner of a corporation. However, a corporation
is taxed as a separate entity, while a limited partnership (and the other types
of companies that offer direct participation) is not. With a limited
partnership, gains, losses, and their accompanying tax consequences "flow
through" directly to the investor.
Limited partnerships and other types of direct participation
programs are at the peak of the risk-return pyramid. Most require a substantial
investment in something for which the potential loss could be absolute, while
the promise of return might be remote at best. However, the potential for high
rewards--not limited to income--is great.
There are many different types of direct
participation programs and each may possess different features. A general list
of their characteristics would include the following:
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They are riskier, generally, than other types of
investments.
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They rarely have great liquidity. Master limited
partnerships (MLPs)--a type of flow-through investment whose shares are traded
publicly on exchanges or over the counter--are as liquid as stocks. However,
these investments still must be evaluated carefully on their economic merits.
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They sometimes provide tax deductions and credits
not available with other types of investments.
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They may have a tax-deferral feature.
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They may make use of leverage to increase the
potential for gain or loss.
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They may or may not produce income, and could even
result in negative cash flow in the early years of investment.
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They may require a more substantial initial
investment than other types of financial products.
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If successful, they may produce capital growth far
in excess of other types of investments.
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Many are established as a relatively short-lived
venture.
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