Definitions for "Pass-Through Taxation"
A tax characteristic where the business entity is not taxed and tax is only paid by the owners of the entity on their personal tax returns. This includes shareholders in an “S” corporation, members in an LLC and partners in a partnership. It is called “pass-through” taxation because the profits of the entity are “passed through” to the owners for the taxes to be paid by them individually. To learn more about pass-through taxation in an S corporation, click here.
Income to the entity is not taxed. Instead the income is "passed through" to the individual shareholders or interest holders. S corporations, Partnerships and LLCs are pass-through taxation entities.
All income and profits are passed through the entity to the owner and this income is only taxed one time. LLCs and S Corporations provide this tax benefit to their owners.