A pass-through entity is a business whose profits 'pass through' to its owners' personal tax returns instead of being taxed at the entity level — sole proprietorships, partnerships, S corporations, and most LLCs. Owners pay tax at individual rates; the business itself generally pays no separate income tax.
In a pass-through entity, business income, deductions, and credits flow to the owners in proportion to their interest and are reported on their individual returns. This avoids the 'double taxation' that applies to C corporations, where profits are taxed at the corporate level and again as dividends. The IRS describes the small-business entity types and their tax treatment in its small-business guidance (https://www.irs.gov/businesses/small-businesses-self-employed). Most U.S. small businesses are pass-throughs. The structure interacts directly with the [[qualified-business-income]] deduction and with [[self-employment-tax]] (sole proprietors and most partners owe SE tax on their share, while S-corp owners split pay between W-2 salary and distributions). Entity choice affects both tax and how owners take money out — see [[owners-draw]].
Sole proprietorships, partnerships, S corporations, and most LLCs. C corporations are the main exception — they are taxed separately at the entity level.
It avoids double taxation and makes owners eligible for the 20% Qualified Business Income deduction, but owners pay tax on business profit whether or not they withdraw it.