We mentioned this last time when discussing the LLC structure, and it’s not obvious what the advantages and disadvantages of a pass-through entity versus a standard C Corporation are.
A pass-through entity is a type of business structure in which the business itself is not taxed on its income. Instead, the owners of the business are taxed on their share of the business’s income, regardless of whether it is distributed or not. The most common types of pass-through entities are partnerships, limited liability companies (LLCs), and S corporations.
In a partnership, the partners are taxed on their share of the partnership’s income. An LLC can be taxed as a partnership, or it can elect to be taxed as a corporation. An S corporation is a type of corporation that has elected to be taxed as a pass-through entity, rather than as a traditional corporation (also known as a C corporation).
The main advantage of a pass-through entity is that it allows business owners to avoid the double taxation that can occur with a traditional corporation. In a traditional corporation, the business is taxed on its profits, and then the shareholders are taxed on their dividends. With a pass-through entity, the owners are taxed only once, on their share of the business’s profits.
It’s worth remembering that pass-through entities are subject to certain rules and regulations that traditional corporations may not be. The tax treatment of pass-through income can vary depending on the specific type of entity, the individual circumstances of the owners, and where in the United States the company is located. Trying to decide if it’s better to file your taxes as a pass-through entity or traditional corporation this year? Let’s take a look together.