Partnerships and S corporations are common pass-through arrangements. Sole-proprietor and disregarded-LLC activity is also generally taxed at the owner level, although the reporting forms differ.
Pass-through does not mean tax-free. Owners can owe tax on income retained in the business. Employment taxes, basis limits, passive-activity limits and state entity taxes can also apply. A distribution is not a substitute for measuring taxable income.
An example
Hypothetical: an S corporation retains cash to buy equipment next year. A shareholder can still owe tax on this year’s allocated business income even if the company distributes no cash.
Reviewed October 7, 2026. IRS reference ↗
This is a general reference. Discuss how the rules apply to your business with your tax professional.