Tax FAQ Series: What’s The Difference Between a Pass-Through Entity and a Disregarded Entity?

There’s an important, but subtle difference between a Pass-Through entity and a Disregarded entity.

An entity that has been organized under the laws of its applicable state can elect to be “disregarded” for tax purposes. Which means that it does not file a separate tax return and all its operations are reported directly on the owner’s personal tax return, usually via Schedule C, E or F. However, the same entity can elect to be treated as a Partnership or S-Corporation, in which case it does file its own separate tax return, then passes the resulting profits or losses on to the owner(s) on form K-1. The owner(s) then report this final information of profits or loss passed to them from the entity on their personal return but no other business information is reflected there. That’s why this type of entity tax reporting is referred to as a “pass-through” entity – it files a return, but doesn’t pay tax, just passes the final information on to the owner.

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