Selecting a business type is a lot like buying a car. There are pros and cons to consider with every vehicle and some will be more suited to your individual needs than others. The same is true when setting up a business. That said, tax treatment is one of the major issues that could lead you to choose one type over another.
With that in mind, the term “pass-through” entity comes up a lot in the literature on business formation. Simply put, a pass-through entity is a company that does not pay corporate tax. Instead, the income “passes through” to the owner, meaning the tax obligation is paid only once on his or her personal return. As you can imagine, this feature can be a major advantage.