What Is a Pass-Through Entity?

A pass-through entity is a business structure where the business itself doesn't pay income taxes at the entity level — instead, profits, losses, deductions, and credits pass directly to the owners and are reported on their individual tax returns. Partnerships, S corporations, and sole proprietorships are all pass-through entities, as are LLCs unless they've elected corporate tax treatment. This structure avoids the double taxation that applies to C corporations, where the company pays corporate income tax on profits and shareholders then pay personal tax again on dividends. The 2017 Tax Cuts and Jobs Act created the qualified business income (QBI) deduction, which allows most pass-through entity owners to deduct up to 20% of their qualified business income on top of their regular deductions — a significant benefit that has no equivalent for C corporation shareholders. The vast majority of small businesses in the U.S. are structured as pass-through entities.