Pass-Through Entities

Pass-Through Entities refer to business structures that do not pay corporate income tax at the entity level. Instead, the income, deductions, and credits generated by the business "pass through" to the owners’ personal tax returns, where they are taxed at individual income tax rates.

Common types of pass-through entities include partnerships, S corporations, and limited liability companies (LLCs) that elect to be treated as partnerships or S corporations for tax purposes. This taxation method allows owners to avoid the double taxation typically associated with traditional corporations, where income is taxed at both the corporate level and again when distributed as dividends to shareholders.

For example, if an S corporation earns $100,000 in profit, that amount will be passed through to the shareholders, who report it on their personal tax returns, potentially at a lower tax rate than if it were taxed at the corporate level.