what is a flow through entity 
a flow through entity is a legal business entity that passes any income it makes straight to its owners shareholders or investors as a result only these individuals and not the entity itself are taxed on the revenues flow through entities are a common device used to avoid double taxation which happens with income from regular corporations understanding a flow through entityboth businesses and individuals are taxable entities that is liable to pay taxes on the money they earn individuals pay income tax on their wages and companies pay corporate tax on their revenues but businesses that are set up as flow throughs are not subject to corporate income tax instead the income generated by a flow through entity aka a pass through entity is treated solely as income of the investors stockholders or owners any earnings directly pass or flow through to the individuals and so does the tax liability these individual stakeholders pay taxes on business income as though it is personal income and it is taxed at their ordinary income rate in addition the owners can apply losses of the company against their personal income 1although flow through businesses generally face the same tax rules as c corporations for inventory accounting depreciation and other provisions affecting the measurement of business profits they are in effect taxed only once earnings generated by c corporations on the other hand are subject to double taxation income is taxed at the corporate tax rate first and then taxed again when paid out as dividends to shareholders or when shareholders realize capital gains arising from retained earnings 2types of flow through entitiesflow through entities are commonly grouped into sole proprietorships partnerships limited general and limited liability partnerships and s corporations along with income trusts and limited liability companies a sole proprietor reports all their business income on their personal income tax return the internal revenue service irs considers this form of company as a flow through given that the business is not taxed separately 3s corporation profits flow through to shareholders who report the income on schedule e of their personal income tax 4 although s corporation owners do not pay the self employed contributions act seca tax on their profits they are required to pay themselves reasonable compensation which is subject to the regular social security tax 5in canada a flow through entity can be an investment corporation a mortgage investment corporation a mutual fund corporation a partnership or a trust 6although flow throughs are considered non entities for tax purposes partnerships and s corporations are still required to file an annual k 1 statement as regular public companies do 78the disadvantages of flow through entitiesone important potential downside to a business that elects to operate as a flow through entity is that the owners will still be taxed on income that they do not directly receive for instance if the business does not distribute its profits to owners in the form of dividends but plows them back into the company the investors are still required to report their share of the profits and could owe taxes on them 9also while they avoid corporate tax some pass through entities owners may be subject to self employment tax 71011