Pass-Through Taxation

What is pass-through taxation?

Some entity types, including limited liability companies (LLCs) are treated as pass-through entities by default—and several others have the option. This means that the entity itself doesn't have to pay corporate income taxes. Instead, each individual owner can report their share of business income on their personal tax return. This system allows owners to avoid double taxation, meaning they aren't taxed twice on the same taxable income.

The Internal Revenue Service (IRS) allows the following entities to use pass-through taxation:

While pass-through taxation simplifies the tax process for many qualifying small businesses, owners may face higher individual tax rates if business income pushes them into a higher tax bracket. Additionally, self-employed individuals typically pay both the employer and employee portions of their Social Security and Medicare taxes. For this reason, owners of pass-through entities may be subject to self-employment taxes on their share of business profits.

For a better understanding of how this system of taxation could impact your business, read this article on the benefits of pass-through taxation.

Pass-through taxation FAQs

What are pass-through businesses?

Pass-through businesses are those that report their business income through their owner's individual tax return, rather than pay separate corporate income taxes. The following business structures qualify for this method of taxation:

Sole proprietorships
Partnerships
S-corporations
LLCs

What is the income limit for pass-through taxation?

The income limit for the qualified business income (QBI) deduction—a tax benefit available to owners of pass-through businesses—changes annually and differs based on your filing status. In 2025, the threshold was $197,300 for unmarried individuals and $394,600 for married couples filing jointly.

Is pass-through taxation a good idea?

Electing to file taxes as a pass-through entity is a good idea for certain businesses. One of the main advantages is that this system avoids double taxation, meaning business owners don't pay taxes on the same income both at the corporate and individual levels. Owners of pass-through entities may also qualify for unique tax breaks, such as the qualified business income deduction, which deducts 20% of their portion of qualified business income.

Do pass-through entities have less asset protection?

No, pass-through entities don't necessarily have less asset protection than corporations or other businesses that elect to file as corporations. In fact, pass-through entities like LLCs and S corporations offer limited liability protection, which means creditors generally can't go after the owners' personal assets to resolve business' debts and liabilities. Consult a business attorney if you have more questions on how business structures and tax-filing status might impact owner liability.

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