What Is a Flow-Through Entity?

February 24, 2020
What Is a Flow-Through Entity?
flow-through entity allows this small business owner to only pay one form of taxes

What Is a Flow-Through Entity?


A flow-through entity is a legal business where income flows through to owners or investors. By doing so, the income is taxed at the individual tax rate for any ordinary income which owners may receive. Because the income flows to owners or investors, the business is not taxed under the corporate income tax. Flow-through entities avoid double taxation.


Do an LLC or S Corporation Get Taxed Directly?


As an LLC or S Corporation, your company benefits from being a flow-through entity. This means that the company will benefit from the before mentioned features of a flow-through entity.


Does Every Corporation Benefit From This?


No. Unfortunately, C Corporations must pay the corporate income tax. Additionally, in a C corporation, shareholder dividends are taxed when distributed.


What Else Is Considered a Flow-Through Entity?


There are a few other legal business entities, apart from an LLC or S corporation, that is considered flow-through entities. Both income trusts and sole proprietorships are considered flow-through entities. Limited liability partnerships, general partnerships, and limited partnerships are all considered sole proprietorships.


Will I Be Taxed on the Money I Withdraw From the Business?


No. For a flow-through entity, taxation is based on the business’s net income. If you were to withdraw 0% or 100% of the funds from the flow-through entity’s bank account, the amount taxed would remain unchanged. This is because owners or investors of flow-through entities are taxed based on the business’s income, even if these profits are not distributed or directly received.


Foster Financial CPA


At Foster Financial CPA we are here to help you with any questions you may have regarding your business. We are located in Phoenix, Arizona and offer you responsive and professional services. Contact us today to discuss your business needs!