What is a "pass-through entity"?

A "pass-through entity" refers to a business structure where the income generated is not subject to corporate income tax at the entity level. Instead, the income passes through to the individual owners or shareholders, who then report it on their personal tax returns. This structure helps to avoid the double taxation that typically occurs in traditional corporations, where income is taxed both at the corporate level and again when distributed to shareholders as dividends.

In a pass-through entity, such as a partnership, limited liability company (LLC), or sole proprietorship, the net income is only taxed once, thereby allowing for more favorable tax treatment for the owners. This system is particularly appealing to small businesses and self-employed individuals, as it can result in lower total tax burdens compared to traditional corporations.

Other options do not accurately describe the nature of a pass-through entity. For instance, businesses that pay taxes at the corporate level (the first option) are typically C corporations, which are not classified as pass-through entities. Additionally, while there are different types of corporations, not all corporations are structured to pass through income. Lastly, the capability to issue stocks pertains to the entity's classification but does not define a pass-through entity. Thus, the second option captures the essence of what constitutes a