PASS THROUGH ENTITY

The types of business entities that are not pass-through are C corporations, along with LLC's and S corporations that choose taxation as a corporate entity—which they might arrange if they have a large number of investors or if there's a lot of risk for them in the business venture.

Pass-through Income

1. Pass-through income from a Partnership
2. Pass-through income from an S Corporation
3. Pass-through income from Rental Properties
4. Pass-through income from a Sole Proprietorship
5. Pass-through income from a Limited Liability Company

Pass-through Tax

S Corporation Taxes

1. It can't be a domestic, international sales organization, possessions corporation, insurance company or bank.
2. It can't have more than 100 shareholders.
3. Must not have shareholders other than individuals, estates, certain trusts, or certain tax-exempt organizations.
4. Must not have non-resident alien shareholders.
5. Must not have more than one class of stock.

LLC Pass-through Taxes

A Limited Liability Company (LLC) taxed as a partnership—or sole proprietorship—may have advantages over an S Corporation. The amount of a Subchapter S Corporation shareholder's deductible losses is limited to the sum of the shareholder's basis in his stock and any loans from the shareholder to the corporation. In contrast, a partner can deduct losses in an amount up to the sum of the basis in the partnership interest, the allocable share of partnership income, and his allocable share of qualifying partnership debt.

How the taxes work is simple; For example, each of 10 individuals contributes $100,000 to acquire an office building, then the entity borrows from a bank an extra $5,000,000 as the balance of the building's $6,000,000 purchase price. If taxed as an S Corporation, each shareholder has a loss-deductions confined to $100,000. However, if the entity is an LLC taxed as a partnership, each member can deduct losses up to $600,000 ($100,000 basis plus $500,000 share of the entity's debt). These losses may then be used by the individuals to offset other income they may have from other sources.

Partnership Taxes

A general partnership has flow-through tax treatment under Subchapter K of the Internal Revenue Code and therefore a general partnership is not subject to direct taxation. Instead, the partnership must file a return and the partners assume liability for their share of the general partnership's gain or loss on a form and their individual returns. Avoiding the entity level tax ensures that income flowing into a general partnership is taxed only once.

A general partnership does not have limited liability, meaning that creditors can reach business and personal assets from the partners. For this reason, we advise that clients form a limited liability partnership (if you are involved in the professions of public accountancy, the practice of law, architecture or related to such practice), a limited liability company or a corporation.