Introduction

Widely used by small to mid-sized businesses, pass-through entities are legal structures where income, deductions, and tax attributes flow directly to owners to be reported on their individual tax returns. This model avoids the “double taxation” typical of C corporations because the entity itself generally pays no federal income tax. Furthermore, forms such as S corporations (Subchapter S), partnerships (Subchapter K), and LLCs offer a dual benefit: they provide the tax efficiency of a flow-through structure while maintaining state-level limited liability protection to shield owners’ personal assets from business debts.

This section examines the tax rules governing these entities by following their operational lifecycle, with a specific focus on the distinctions between S corporations and partnerships. While an S-corp maintains a corporate structure similar to a C-corp, a partnership operates as a flow-through entity without a corporate framework. The discussion follows the entity’s lifecycle: beginning with formation and capital contributions, progressing through the allocation of operating income and distributions, and concluding with the tax implications of liquidation or ownership transfers.