What Is a Taxable Entity?

What Is a Taxable Entity?
A business meeting in a conference room.

Taxable Entities

Under U.S. tax law, individuals and corporations have to file a tax return and pay income tax on earnings. For example, even if a corporation distributes all of its earnings to individual owners, the corporation itself is subject to income tax. Since corporate earnings are taxed at both the corporate and individual level, tax experts say that corporations are subject to "double taxation."

Nontaxable Entities

Other business entities, referred to as pass through entities, are not taxable entities and don't pay income tax. Partnerships, LLCs and S corporations are examples of nontaxable, passthrough entities. Although these businesses must still file tax returns, they aren't subject to income taxes. Rather, the earnings from these businesses are subject to tax at the individual level. For example, if a partnership earns $500, the individual owners pay tax on the $500, rather than the partnership itself.