You say what is a Pass Through Entity? A registered Limited Liability Corporation (LLC) is considered as a “pass through” entity. It simply means that the LLC doesn’t pay taxes in a corporate tax system. However, the profits and loss are pass through the business and reported on the individual(s) tax return. The individual(s) pays taxes on the income, but the business itself doesn’t pay taxes! And, there is a rising number in these types of business formats. Why you say?
1). It is easy to set-up.
2). It doesn’t require a lot of management that has to be reported to its respected agencies.
3). Its cost efficient for a start-up.
4). It provides the same Corporate Legal statue from your governing State as a C-Corp and S- Corporation.
Moreover, with the rising number of businesses that are setting up as an LLC, honestly it is complicating the efforts to reform the corporate tax codes in the U.S. And, because small businesses are increasing in organizing themselves as LLC or S-Corps even those businesses that are brick and mortar locations it is creating a decline in C-Corps set-ups. It’s not just the small businesses that are organizing in this matter, but there are large law firms, accounting firms and hedge funds, that operate as a pass-through entity. And, even major manufacturers in the U.S. aren’t C-Corps but instead operate as either a S-Corp or possibly an LLC.
And, because of the increase in how businesses are organizing it is complicating the corporate tax code! Because some of the changes to corporate tax codes would mean that pass-through entities will lose some of their tax breaks. And, if the individual tax codes aren’t revised i.e. modernized to today’s business cycle (straight forward), it will mean that business owners will pay more each year, due to the loss of their tax breaks.
The challenge is that, even with us discussing that tax rates are different for corporations and individuals is that in most cases, individual taxes are still connected to corporate taxes.
So, how do we fix this problem? Well having a bipartisan support is primary and it seems that all parties agree that the TAX CODE should be changed. But, they don’t all agree on what should be changed! In talks are options like offering small businesses “special breaks”. But there is a second layer to this and it is the very complicated matter of Capital Gains “shareholders selling dividends and stocks”. And, because there are many who are exempt taxes on their first layer of corporate taxation, many of those same entities (retirement accounts and pension funds) will find themselves subject to taxes on that layer.
So, the complicated areas have been identified, and those intricacies can be worked out however until there worked it will be fraught. In the meantime, while policymakers attempt to compromise, there is a HUGE deal of work that goes into un-complicating the tax codes.