Flow-Through Entity
Candlefocus EditorA flow-through entity is an entity that passes all its income directly to the owners or investors of the business. This enables the profits derived from the business to be taxed only on the individual owner’s income tax rate, eliminating double taxation. The main types of flow-through entities include Sole Proprietorships, Partnerships (Limited, General, and Limited Liability Partnership), Limited Liability Companies (LLCs), and S Corporations.
Under the flow-through structure, the profits of the business are considered the income of each individual owner, who is then responsible for the taxes due on that income. Since the entity does not pay federal income taxes, the income is only taxed once when it is distributed to the owners. This differs from the Corporation flow-through which pays taxes first, and then passes its remaining money to shareholders.
The main benefit of incorporating as a flow-through entity is that it prevents double taxation on profits earned. This also helps keep profits and earnings in the hands of the original owners as opposed to being taxed as corporate profits.
Whilst the flow-through entity may provide a number of tax advantages, there are also some downsides. Owners can be liable to tax on income they do not actually receive or take out of the business, this is called ‘phantom income’. This can be one of the main challenges of the flow-through entity form of business.
Overall, a flow-through entity can be a beneficial option for business owners looking to avoid double taxation and keep their taxed income as low as possible. To decide whether this form of entity is right for your business, it is important to consider the pros and cons carefully and seek out advice from legal and financial professionals.