What is a pass-through entity?

Partnerships and S-corporations are pass-through entities. As ‘passthrough’ implies, the profits of the business are passed to the owners, and federal income taxes are paid on their individual tax return filings (1040 tax return). There is no federal income tax due directly on these entities, though there can be other types of taxes due on both federal and state levels.

Typically, profits are shared with owners based on ownership percentage in these entities.