What is a Pass-Through Entity?

A pass-through entity refers to a type of business structure that allows the income and losses of the entity to pass through to its owners (investors) for tax purposes. The entity itself does not pay income taxes; instead, the owners report their share of the entity’s income or losses on their individual tax returns.

The most common types of pass-through entities used in venture capital include:

• LLC (Limited Liability Company) — income and losses “pass through” to members’ personal tax returns

• Limited Partnership (LP) — income and losses flow through to the partners’ personal tax returns

• S Corporation — passes through income and losses to its shareholders