A legal business entity that passes all its income on to the owners or investors of the business. The income of this entity flows to its owners/ investors, and cannot be treated as its own income. Such an entity is treated as a partnership or trust for income tax purposes, or other purposes. A fiscally transparent entity (also,a flow through entity or a pass-through entity, PTE) may take the form of a trust established for the benefit of an entity’s creditors in order to secure certain debt obligations or a trust established to hold shares of the capital stock of a corporation in order to exercise the voting rights attached to these shares.

Sole proprietorship and S corporations also operate as flow-through entities. Business that are not subject to the corporate income tax have their profits flowing through to owners and are taxed under the individual income tax.

The main advantages of a flow-through entity include 1) income is subject to a single layer of income tax at the owner’s individual tax rate for ordinary income and 2) individual owners may deduct business losses against current income from other sources, subject to certain limitations for “passive losses.”  Corporations, otherwise, cannot claim loss carrybacks, leading to delayed tax benefits from these losses, and a reduction of these benefits’ present value (for more, see: advantages of flow-through entities).