INTRODUCTION

In this essay, our group will illustrate the definition pass-through entity, types of
pass-through entities, its benefits and drawback.

I. Definition, classification of Pass-through entity and taxes.

1. Definition of a flow-through entity.

A flow-through entity is a legal business entity that passes income on to the owners
and/or investors of the business. Flow-through entities are a common device used
to limit taxation by avoiding double taxation.

2. Types of Pass-through entities.

 Sole Proprietorships: A business with a single owner. All net income from
sole proprietorships is also subject to payroll taxes under the Self-Employed
Contributions Act (SECA).

 Partnerships: General partners are subject to SECA tax on all their net
income, while limited partners are only subject to SECA tax on “guaranteed
payments” that represent compensation for labor services.

 Limited Liability Companies (LLCs): LLCs are companies authorized under

state laws. There is no maximum number of members and most states also
allow single ownership. LLCs may elect to be taxed as a corporation,
partnership, or as part of their members’ tax return (a “disregarded entity”).

 S-Corporations: S-corporations can have only one class of stock and cannot
have more than 100 shareholders, who must be US citizens or resident
individuals. They are required to pay themselves “reasonable
compensation,” which is subject to the regular Social Security or “FICA”
tax.

3. Types of taxes.

(Phần lý thuyết)
There are two types of taxes: sales tax and business income tax.

Sales tax – is a tax on the sale of a product or service. The actual percentage
of the tax is determined by the state in which your business does business.

Business income tax – is the tax that is imposed on business income. This
income is subject to taxes.

(Phần dẫn chứng số liệu)

According to Internal Revenue Code:
• 26 CFR § 1.1441-1 - Requirement for the deduction and withholding
of tax on payments to foreign persons.
• (23) Flow-through entity. A flow-through entity means any entity that
is described in this paragraph (c) (23) and that may provide documentation
on behalf of its partners, beneficiaries, or owners to a withholding agent.
1. advantages of taxation in pass-through entities
What this means for your business it means many things, including
generating more net income over time. Your business can enjoy the
following advantages when utilizing pass-through taxation: You will
generate more net income You can continue to build and invest in your
business You will attract better outside funding It will increase your
company value and keep you in business Owners will be able to keep more
income

2. Disadvantages of taxation in pass-through entities.

 The owners will still be taxed on income that they do not directly receive.

 A business may prefer corporate taxation (becoming a double-taxed entity)

because it allows the company to retain earnings to reinvest in the company,
and may result in a lower personal income tax burden for the owner(s).

CONCLUSION
To choose the right entity for your business, it is important to consider how a
particular structure impacts your taxes as well as the overall pros and cons.