Accounting

Flow through Entities

What is Flow through entities? How are they different from a regular C-corporation? Well I am about to tell you and give the answers that you are looking for. Flow through entities is where income flows through to investors or owner; the income of entity is treated as the income of the investors or owners.

Flow through are also known as pass-through entities or fiscally transparent entities. FTE also passes its profits and losses on to the owners and or investors; FTE includes S corps, partnerships, sole proprietorships, and LLC. It allows owners to deduct net losses against other sources of income. It is very important to keep personal and business records separate.

By default, partnerships and most limited liability companies are flow-through entities. These companies can elect to be taxes as a corporation or whether to file S- election. If they choose to file as a corporation they opt out of being flow through entity. But some entities do not pay tax themselves, they take their income and expenses and flow through to and are reported by their principals.

There are some down fall to all of this and it is a double tax it comes from the C- corporation. This happens if the corporation does not elect “S” status that is taxed under the sub chapters and is also called C-corporation. A C- corporation files an income tax return form 1120 and pay tax on other income. There are no current deductions for dividends paid to shareholders so the corporation pays tax on money distributed as dividends to shareholders.

C-corporations are taxed on their net income; C-corporations have their own corporate tax rates and which are structured differently than personal tax rates. Employees who preform services are considered shareholder who pays SIT and Social Security tax and Medicare tax which comes out of their salary. The post-tax net income of the C-corporation can be distributed in the form of dividend. The C-corporation can decide how much to...