One of the most critical decisions you can make about your business is how you want to structure it. For many people, that may mean making your company into what is known as a “pass-through” entity. But what exactly are pass-through entities, and what are the potential benefits of creating your business as one?
What Are Pass-Through Entities?
Put in simple terms, pass-through entities are types of businesses where their income “passes through” to their owners, meaning that the income is considered to belong to the owners rather than the business itself. This means that the company’s income is taxed as personal income, rather than as corporate income. As a result, there are significant legal and financial ramifications to having a pass-through entity for your business.
What Types of Businesses Are Considered Pass-Through?
When people talk about pass-through entities, they are typically referring to two types of businesses: limited liability companies, or LLCs, and Subchapter S Corporations, which are also known as S-Corps. These types of businesses have their own specific requirements, with S-Corps having particularly strict criteria. Sole proprietorships and partnerships, which are generally less formal business structures, are also considered pass-through.
What Are the Benefits of Pass-Through Entities?
The primary benefit of pass-through entities is that their income is considered personal income, and is taxed accordingly. This is substantially different compared to corporations, which are subject to the corporate income tax, leading to the phenomenon known as double taxation. Pass-through entities avoid this issue, allowing them to potentially reduce their tax burden by a substantial amount.
What Should You Do?
Ultimately, the decision about how to organize your business is a major one, and what works best for you will depend on your personal circumstances. That is why you should speak to a lawyer with experience handling business law matters. They can help review your case and ensure your business organization suits your personal needs.
If you have a business law issue, give the Law Office of Andrew Ross Sack a call. Andrew Ross Sack is a New York and New Jersey business lawyer who has considerable experience in handling the many aspects of business law. To schedule a consultation with New York City/Long Island/Westchester business lawyer Andrew Ross Sack, call (516) 526-3319 or visit his contact page.
