What is Pass-Through Entity?

In a pass-through entity, the business generally does not pay federal income tax. Instead, its profit or loss "passes through" to the owners, who report their shares on their individual returns. The IRS describes the structures on its business structures page.

Common pass-through entities

• Sole proprietorships and single-member LLCs treated as disregarded entities
• Partnerships and multi-member LLCs taxed as partnerships
• S corporations

C corporations are not pass-through entities: they pay corporate income tax, and shareholders pay tax again on dividends.

How owners are taxed

Owners pay tax on their share of profit whether or not it is distributed. A partner allocated $80,000 of profit owes tax on $80,000 even if the partnership kept the cash to buy equipment. Owners receive a Schedule K-1 from partnerships and S corporations showing their share.

Related deductions and taxes

• Pass-through owners may qualify for the qualified business income deduction
• Sole proprietors and many partners pay self-employment tax on their share
• S corporation owners pay payroll taxes only on wages, not distributions

State-level differences

Some states tax pass-through entities directly, offer elective entity-level taxes, or impose franchise and gross receipts taxes regardless of pass-through status. See our state guides.

Cash planning

Because owners owe tax on profit, not distributions, pass-through businesses often distribute enough cash to cover owners' taxes. Plan for estimated payments. Compare structures in our guide to business structure tax considerations.

Related terms

• Schedule K-1: Schedule K-1 reports each owner's share of a partnership's or S corporation's income, deductions and credits.
• Self-Employment Tax: Self-employment tax is the Social Security and Medicare tax paid by people who work for themselves, calculated on net earnings from self-employment.

Browse more definitions in the small business glossary.