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What is a flow-through entity?

What is a flow-through entity? What advantages do flow-through entities have over a regular corporation? Compare and contrast the tax characteristics of an S corporation and a partnership.

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A flow through entity or pass through entity is one where the income AND losses passes through to the individual members of the entity.

This avoids the concept of double taxation, where the entity first pays tax on the income generated and then the individuals who own the entity (or shares of the entity) end up having to pay tax again on what they received from the entity.

This double taxation occurs with corporations where the income of the corporation is first taxed (currently at 35%) and then the individual pays taxes (at their rate i.e. 39%) on the amount distributed to them. Dividends as opposed to cash distributions are taxed only at the individual level and currently are taxed at the flat rate of 15% assuming a high individual tax rate. Only C corporations and S Corporations can pay out dividends. Dividends are only paid once

Note, Partnerships and Limited Liability companies do not pay out dividends assuming that it is being treated as a pass through entity.

The ability to pass through losses can allow a taxpayer to take those losses and use them to offset income generated through other active activities. This is especially beneficial when a taxpayer may have some businesses that are doing very well and ...

Solution Summary

A Flow Through entity helps avoid the concept of double taxation, where the entity first pays tax on the income generated and then the individuals who own the entity (or shares of the entity) end up having to pay tax again on what they received from the entity.

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