Define a pass-through entity.

A pass-through entity is a business structure where the income generated by the entity is not taxed at the corporate level. Instead, the income is "passed through" directly to the owners, partners, or shareholders, and it is taxed at their individual tax rates. This means that the profits of the business are reported on the owners' personal tax returns, allowing them to avoid the double taxation often associated with traditional corporations.

This structure is beneficial as it can lead to a lower overall tax burden for the business owners, especially when individual tax rates are more favorable than corporate tax rates. Common examples of pass-through entities include sole proprietorships, partnerships, limited liability companies (LLCs), and S corporations. This allows for a more straightforward tax process, where the business itself does not pay income tax on its profits; instead, tax responsibility is transferred to the individuals who have ownership stakes in the business.