Pass Through Businesses Explained

The advantage of so-called pass-through businesses is that the profits “pass through” as taxable income to the participants. In a C-corporation, a business whose stock is publicly traded, profits are taxed up to a rate of 35 percent at the corporate level and up to 23.8 percent when they are sent to shareholders as capital gains or dividends.

There are four types of businesses that are taxed as pass-through businesses.

  1. Sole proprietorships
  2. Partnerships
  3. Limited Liability companies
  4. S-corporations

In 2014, about 95 percent of businesses were pass-through businesses. Sole Proprietorships, businesses with a single owner, comprised 43 percent of the pass-through businesses and 41 percent of all businesses. The net income of sole proprietorships is subject to the income tax and payroll taxes.

Partnerships are the second most common pass-through business. Partnerships file a tax return, but the partnership’s income is distributed to the partners as described in the partnership agreement. Limited liability companies (LLCs) can elect to be taxed as partnerships.

S-corporations typically have the same legal protections as do C Corporations. They file a corporate tax return, but their income is passed-through to the shareholders of the S Corporation in amounts equal to the percentage of shares owned by each shareholder.

In 2014, one percent of pass-through businesses had receipts worth more than 10 million dollars. Those businesses accounted for almost 83 percent of the sales made by pass-through businesses and 81 percent of the profits earned by pass-through businesses.

Large businesses are responsible for almost all of the sales and profits of C Corporations and a large amount of the sales and profits of S Corporations. Among Sole proprietorships, only nine percent of sales and one percent of profits came from large businesses.

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