Which Form 8865 Entities 2024

Hi, this is Lee Phillips. I want to talk to you about a terminology called pass-through. It's a tax term that is often misunderstood. People think that an LLC is the only pass-through entity, but that's not necessarily true. Whether an entity is a pass-through or not depends on how it is taxed. Pass-through means that the owners of the company are taxed on its profits or losses, and the company itself does not pay taxes. Instead, the owners receive a K1 form and are responsible for paying taxes on their income. This means that any entity can be a pass-through entity, not just an LLC. For example, a sole proprietorship is also a pass-through entity, where the owner is taxed on all the income. The advantage of an LLC is that it can choose how it wants to be taxed. It can be treated as a sole proprietorship, a partnership, or even as a corporation under subchapter S or chapter C of the IRS code. Both S corporations and C corporations have identical paperwork and requirements for maintaining the corporation, but the taxation differs. If an LLC is taxed under subchapter S, it is considered a pass-through entity, and if it's taxed under chapter C, the company itself pays the taxes. However, the LLC can also choose to be taxed as a partnership or a sole proprietorship. This flexibility is not available to corporations. So, when someone says that the advantage of an LLC is that it is a pass-through entity, it's not entirely accurate. The pass-through term is related to taxes and not the legal structure. It simply means that the owners bear the tax burden of the company's profits or losses. I hope this clarifies the terminology of pass-through for you. This is Lee Phillips signing off.