What is a Pass-Through Entity?
In general, the term “pass-through entity” refers to businesses that don’t pay corporate income tax. Here’s what you should know:
What’s an example of a pass-through entity?
A pass-through entity is a business in which profits to flow through to the business’s owners or members. In this sense, business finances are reported to the IRS on the business owners’ personal income tax returns. Examples of pass-through entities include:
- Sole proprietorships
- Partnerships
- Limited liability companies (LLCs)
- S-corporations (S-corps)
Is a disregarded entity a pass-through entity?
Yes. A disregarded entity is a business that’s treated as a separate entity from its sole owner—as opposed to a sole proprietorship—but whose finances get reported on its owner’s tax return. In other words, with disregarded entities, the IRS disregards the fact that the business is separate from its owner. The most common type of disregarded entity is known as a Single Member Limited Liability Company (SMLLC). (Provided the SMLLC has NOT elected to be treated as a corporation.)
For more on SMLLCs, check out Northwest’s Single Member LLC page.
Do pass-through entities pay taxes?
Yes. Pass-through entities still pay taxes on their profits. However, instead of paying income tax at the corporate tax rate, pass-through entities report business taxes on their owners’ personal income tax reports. “Pass through” simply means that the business’s profits flow from the business itself to its owners when it comes time to file taxes with the IRS.
How can I form a pass-through entity?
“Pass-through entity” is not a business type in and of itself. Pass-through taxation is simply one aspect of certain business structures. To benefit from pass-through taxation, you would have to form a business entity type that inherently receives pass-through taxation, like a sole proprietorship, a partnership, an LLC, or an S-corp.
For the pros and cons of different entity types, you might want to check out Northwest’s page LLC vs Partnership, or S-Corp vs LLC.
