A Flow-Thru Entity is a legal entity that does not pay taxes, that is the first attribute. It is an entity where any income, expenses, interest income, dividends, or any income of a taxable item is passed through to its owners on a pro-rata basis.
An example: a partnership will have at least two partners, and they will have an ownership percentage, say it is 50 % each. So whatever underlying partnership has as a taxable event during that year, each partner will pick up those particular items; so it is a flow-through, the entity is a reporting entity, it does not pay any taxation.
As a result, only these individuals—and not the entity itself—are taxed on the revenues. Flow-through entities are a common device used to avoid double taxation, which happens with income from regular corporations.
Flow-through entities are a common device used to avoid double taxation on earnings. With flow-through entities, the income is taxed only at the owner’s individual tax rate for ordinary income: The business itself pays no corporate tax. Sole proprietorships, partnerships (limited, general, and limited liability partnerships), LLCs, and S Corporations are all types of flow-through entities. One downside of flow-throughs: owners can be taxed on income that they do not actually receive.
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