Pass Through Entity Explained

   • Pass Through Entity Explained  

Pass Through Entity Explained

The vast majority of America’s family businesses are operating as “pass through” entities and as a result are paying higher taxes than corporations, according to results from the new Family Enterprise USA Family Business Annual Survey.

This year’s Annual Family Business Survey on the state of family businesses in America was the largest survey taken to date, with 789 respondents from 40 states completing the survey.

The survey found when it comes to family business ownership 78% are “pass through entities,” which get taxed at the significantly higher personal income tax rates rather than the 21% rate corporations pay today.

With pass-through taxation, a business’s income “passes through” to the business owner’s personal tax return. Sole proprietors and other small businesses are often set up as pass-through entities, with the owner's business income treated the same as their own personal income.

In breakdown of owners, the survey found 57% of family businesses are S Corporations, 19% are limited liability entities, and 2% operate as partnerships. These three entities are all “pass throughs” and pay as much as 37% in federal taxes.

Family businesses operating as C Corporations, which pay 21% in taxes, account for only 18% are C Corporations, the survey found. In addition, only 3% are managed by trusts, the data showed.

However, when it comes to planning for transitioning to the next generation of ownership, 75% say they “use trusts for planning” for the future entity changes.

America’s family businesses are the largest private employer in the country, accounting for 83.3 million jobs in 32 million family businesses. Family businesses contribute $7.7 trillion annually to U.S. gross domestic product, according to research.

When asking about family business ownership and control of family businesses, the survey found 85.5% are “sole or majority owners.”

The breakdown showed 59.5% are “sole owners,” while 26% were “majority owners.”

Only 6.5% did not own or manage their company, while 6% were minority owners, and 2% were managed by non-owners, the survey found.

“Despite the many challenges facing family businesses, pass through entities are taxed at an unfairly high level compared to corporations, yet family businesses are the largest private employers in the country,” said Pat Soldano, President of Family Enterprise USA and the Policy and Taxation Group, both advocates for family businesses on Capitol Hill.

“This year’s survey highlights further this large discrepancy in taxation between corporations and pass-through entities, like the majority of family businesses,” she said. “We need to educate our legislators on Capitol Hill so they understand the importance family businesses in our economy, and to help level the playing field as they start developing new tax legislation.”

https://policyandtaxationgroup.com

Policy and Taxation Group is the Voice for Family Offices and Successful Individuals in Washington, DC focused exclusively on the critical tax and economic policies that impact them.

Since 1995, PATG has been the leading advocacy group working to reduce and eliminate estate tax, gift tax, and generation skipping transfer tax while blocking increased income tax and capital gains taxes, the creation of a wealth tax, and other hostile tax policies that punish hardworking taxpayers and success.

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