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Pass-Through Entities Face Myriad State-Level Taxes, Compliance Obligations

Pass-through entities, such as partnerships, limited liability companies, and S corporations, are the most widely chosen forms of business entities in the U.S. because they escape tax at the entity level for federal income tax purposes. Instead, income is allowed to flow through to the owners (e.g., partners, LLC members, or S corporation shareholders) before being subject to the individual or corporate income tax.

Taxation of these entities, however, is very different at the state level. The lack of clarity on how states tax these entities creates significant risks for these businesses and their tax advisors.

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