If you’re a small business owner or partner in a partnership, you’ve probably heard about pass-through taxation. However, if you’re unsure exactly what it is, let’s explore its meaning and how it works. In short, a pass-through entity is a way for a business owner to avoid paying taxes at the corporate level and instead pass those taxes on to the owner or shareholders. This can result in significant savings for small businesses, making it a popular option. In this blog, we’ll go through the process of pass-through entity taxation so that you can understand how it can benefit your business.
3 Main types of Pass-Through Entities
Regarding taxation, pass-through entities are categorized into three main types: sole proprietorships, partnerships, and S corporations. A sole proprietorship typically operates the business by a single individual. The owner reports their business income and expenses on Schedule C of their tax return, and no separate tax return is prepared for the entity itself. This means the owner is responsible for paying taxes on the business’s income.
C Corporations
In a typical corporation, known as a C corporation, the profits of the corporation are taxed at the corporate level. The corporation files its tax return and pays tax on the corporate profits, and any dividends paid to shareholders are then taxed at the individual level. This results in double taxation, which can significantly burden small businesses.
S Corporations
On the other hand, pass-through entities, such as partnerships and S corporations, allow the profits and losses of the business to be passed through to the owners or shareholders. This means that the business itself is not taxed at the corporate level, but rather, the profits are sent directly to the owners to be included on their tax returns.
Pass-through entities also have the advantage of allowing the owners to deduct their share of the business losses from their personal income tax returns. This can help offset any income earned outside of the business, reducing the taxes owed overall.
Consider All Options for Your Small Business
It’s important to note that pass-through entities are only sometimes the best option for some small businesses. Each business has unique financial needs, so it’s important to consult with a tax professional to determine whether a pass-through entity is right for your business.
Pass-through entity taxation allows small business owners to save on taxes by avoiding double taxation and allowing profits and losses to be passed through to the owners or shareholders. However, it’s important to take the time to determine whether this type of entity is right for your business and to consult with a tax professional for guidance. By understanding the basics of pass-through entity taxation, you can make informed decisions that will benefit your business in the long run.
Work with a Hollywood Taxation Attorney Today
At Kramer and Green, we pride ourselves on offering comprehensive corporate and taxation services to our business clients. We want to serve as your legal counsel from the time you formulate the idea to open a new business until you retire. We will accompany you on that journey every step of the way by giving you the legal advice you need.
Don’t hesitate to contact our office by calling (954) 884-8385 or looking us up online. We stand ready to tackle your most pressing legal issues and work to solve any problems that you may be experiencing.