Pass-Through Entity
A business structure where income and losses flow to the owners' personal tax returns rather than being taxed at the entity level.
What is Pass-Through Entity?
A pass-through entity is a business that does not pay entity-level income tax. Instead, its profits, losses, deductions, and credits pass through to the individual owners' tax returns, where they are taxed at each owner's personal income tax rate. Common pass-through structures include sole proprietorships, partnerships, S-corporations, and LLCs taxed as partnerships or S-corps. This structure avoids the double taxation imposed on C-corporations. Owners of qualifying pass-through businesses may also benefit from the 20% qualified business income (QBI) deduction under IRC Section 199A.
Example
An LLC with two equal partners earns $200,000 in profit. The LLC files an informational partnership return (Form 1065) and issues each partner a Schedule K-1 showing $100,000 of pass-through income. Each partner reports their $100,000 share on their personal Form 1040 and pays tax at their individual rates—the LLC itself pays no entity-level income tax.
Source: IRS — S Corporations